2 stocks I’d buy over Rolls-Royce

Plane on runway

UK investors continue to pile into Rolls-Royce shares. Last week, Rolls-Royce was one of the most purchased stocks on a number of major investment platforms.

While its share price could potentially rise from here as the travel industry rebounds, I won’t be buying the stock. The reason? The FTSE 100 company has a very poor record when it comes to generating long-term shareholder wealth. Over the years, it’s disappointed investors on many occasions.

There are plenty of other UK shares I’d buy today however. Here’s a look at two.

This FTSE 100 company is flying under the radar

One FTSE 100 stock I like the look of right now is Hikma Pharmaceuticals (LSE: HIK). It’s an under-the-radar healthcare company that manufactures generic, branded, and injectable medicines.

Hikma has a much stronger track record than Rolls-Royce when it comes to generating long-term growth. While Rolls-Royce’s revenue went backwards between 2015 and 2020, Hikma’s top line surged 63%.

There’s more to Hikma than just revenue growth however. This company’s quite profitable and has a good dividend growth track record. Last year, it increased its payout from $0.44 per share to $0.50 per share (Rolls-Royce paid no dividend).

Of course, Hikma isn’t perfect. Like every company, it’s had setbacks in the past. In 2017, for example, it generated a loss on the back of challenging market conditions and some issues with the US Food and Drug Administration (FDA). It could experience similar issues in the future.

Overall however, I see a lot to like about Hikma. At its current valuation (forward-looking P/E of 19.6), I think the stock’s worth buying. 

A very profitable company

Another UK share I’d buy over Rolls-Royce is Rightmove (LSE: RMV). It operates the UK’s largest property website.

Rightmove also has a very good track record when it comes to generating long-term growth. Between 2015 and 2019, revenue climbed from £192.1m to £289.3m. Revenue did take a hit last year during the pandemic (£205.7m), but it’s expected to bounce back this year. Currently, analysts forecast revenue of £295.2m for 2021.

One thing that stands out about Rightmove is that it’s extremely profitable. Over the last three years, return on capital employed (ROCE) has averaged 427% (versus -7% for Rolls-Royce). Companies that generate a very high ROCE tend to be good long-term investments.

As Warren Buffett’s business partner Charlie Munger says: “If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much different than a six percent return. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

A risk to consider is rising competition. Companies such as Zoopla and OnTheMarket are trying to grab market share. However, they’ve a long way to go to topple Rightmove. Last year, its market share of the top four property portals was 87.8%.

Rightmove shares aren’t cheap. Currently, the stock trades on a forward-looking P/E ratio of about 32. I think RMV is worth the premium though. At its current valuation, I see it as a ‘buy’.

The post 2 stocks I’d buy over Rolls-Royce appeared first on The Motley Fool UK.

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Edward Sheldon owns shares of Rightmove. The Motley Fool UK has recommended Hikma Pharmaceuticals and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.