Warren Buffett has repeatedly said that investors should only own companies with a competitive edge. This should be an advantage that helps them stand out from the competition in the aggressive and competitive business world.
Rolls-Royce (LSE: RR) shares exhibit the sort of competitive advantages the ‘Oracle of Omaha’ is looking for. The company’s brand is known the world over, and it is one of the world’s largest manufacturers of engines for the civil aviation industry.
This is not the sort of market where companies are willing to skimp on quality to get a better price. Aircraft manufacturers and owners will pay whatever the company demands to keep their planes in the skies.
The company is also responsible for maintaining and developing the UK’s nuclear submarine fleet. Once again, this is not the sort of business where the customer can shop around to get a better price. Nuclear technology is closely guarded and regulated. I think it is unlikely Rolls will ever be replaced in this role.
Buffett has already shown that he has a preference for unique companies in the aerospace industry.
Warren Buffett’s aerospace engineer
Several years ago, Buffett’s company, Berkshire Hathaway, acquired aerospace engineer Precision Castparts Corp. This enterprise exhibits similar qualities to Rolls-Royce, although it does not have any exposure to the nuclear industry.
Considering all of the above, I do not think it is unreasonable to say that Buffett could be interested in Rolls-Royce. However, the company does have some issues, which may take time to overcome.
For example, during the pandemic, the business took on a lot of debt to keep the lights on. It could take years for it to reduce these obligations. At the same time, the firm had to lay off thousands of workers to lower costs. Its smaller footprint could hold back growth in the years ahead, even though the firm may have larger profit margins.
I also need to consider the competitive environment. While Rolls is one of the largest manufacturers of engines for the civil aviation industry globally, it is not the only company in the space. If the enterprise struggles to meet rising demand due to its lower headcount, it could lose market share.
Despite these challenges, I think the company looks attractive as a speculative economic recovery play over the next few years.
The outlook for Rolls-Royce shares
As I have explained above, the group exhibits several Buffett-like qualities and competitive advantages which could work in its favour and help support growth as the economy recovers after the pandemic. Therefore, I would follow Warren Buffett’s advice to invest in high-quality companies and buy Rolls for my portfolio.
While the company will almost certainly face some challenges as planes return to the skies, this should act as a tailwind for growth in the years ahead.
Over the long term, the group should be able to capitalise on its competitive advantages, build on its existing footprint, and expand into new markets worldwide.
Should you invest £1,000 in Rolls-Royce right now?
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Rupert Hargreaves owns Berkshire Hathaway (B shares). The Motley Fool UK has no position in any of the shares mentioned. 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.
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