Tuesday share tips: Rolls Royce
Bad habits are hard to break, with Rolls Royce’s latest profit warning being a case in point. It may just be the standard kitchen-sinking exercise after the company’s new boss, Warren East, came in. Nonetheless, it should be noted how the company’s stock dropped by 9%, twice the amount of its earnings downgrade for this year. That means the shares are now trading on just 13 times forward earnings, a discount to its long-term average of 15 times.
Aerospace and Defence
10,597.35
17:09 25/04/24
FTSE 100
8,078.86
17:14 25/04/24
FTSE 350
4,434.34
17:09 25/04/24
FTSE All-Share
4,387.94
16:49 25/04/24
Rolls-Royce Holdings
405.70p
17:15 25/04/24
The marine division continues to be dogged by the slump in oil prices and is now only seen ‘breaking even’, management said. Even the aerospace operations, where it makes its ‘bread and butter’, are suffering from poor visibility. That is the result of a difficult to predict transition towards increased use of its new Trent 7000 jet engines and a quicker than forecast drop-off in sales of the older Trent 700 model. The company has failed to correctly anticipate and communicate the problems arising from an economically sensitive end market combined with its very long product development cycle. “It deserves every bit of its lower valuation,” the FT’s Lex column says.
Rolls Royce’s new chief is no stranger to profit warnings, he delivered one just after coming on board at ARM Holdings. He did so again on Monday after just one week on the job. The company now sees cash flow coming in at between a positive £150m and a negative £150m. That is sharply lower than the $781m seen in 2013. The dividend payment but the generous increases of previous year’s may be in peril while the share buyback has been put on the backburner. “Remarkably, the shares are still trading at a premium to the sector. Take profits until the dividend policy is clear,” says The Times’s Tempus.