Stock of the day 12/02/2015 – Rolls-Royce Holdings PLC

Rolls-Royce Holdings PLC had a torrid 2014, and with its full year earnings release taking place on Friday 13th, the company may struggle to find much good news for investors.

The world’s second largest maker of aircraft engines started 2014 at £12.77, and quickly hit its yearly high of £12.94 on January 6th. However its spark went out pretty quickly, and in the middle of February suffered a 13% to £10.46 after a disappointing full year 2014 release. From then until September the stock steadily chugged along, not really deviating from its £10.50 price. However, a less than positive guidance update in the middle of October saw another precipitous drop, this time 12%, to £7.88, before falling another 10p to hits its 2014 low. The company picked up by around a pound by the start of 2015 to trade at £8.70, before creeping up to £9.01 ahead of its announcement tomorrow.



There are a few key issues investors will be watching carefully come Friday. First up is new CFO David Smith; Smith was appointed in November, and promised more financial transparency from the company. Considering this is his first earnings release in his new role, his comments will be scrutinised. During the same period the Rolls-Royce Holdings announced it was going to axe 2600 jobs in a cost-cutting move so another similar act could be in the works. In more positive news, November also saw the announcement of a $5 billion contract with Delta Air Lines to supply engines for 50 new aircraft, the fruits of which should be felt in this full year report.

With its aerospace business bearing the brunt of the company’s sales, the cheapness of oil presents an interesting conundrum for Rolls-Royce Holdings. Its aero-engineering sector may see an increase in sales as flight prices go down and engine demands increase in-line with holiday makers. However there have also been cuts in oil and gas exploration by the industry giants, which could harm the company’s ship-engine enterprises. At the same time cheap oil might see an increase in trade shipping as it becomes a less pricey venture; the unclear nature of the oil-price-crisis’ impact on the company is the reason Rolls-Royce Holdings avoiding the issue in its November statement.

In terms of actual figures, the company claims that restructuring charges are set to drain around £60 billion from underlying profit in both 2014 and 2015, whilst there are forecast of a 3.5-4% drop in revenue, a fall in net profit from $1.4 billion to $1.2 billion, and an earnings per share contraction to £0.64 from £0.72. Given the mixed nature of the news surrounding Rolls-Royce Holdings, the company has received a consensus rating of ‘hold and an average target price of £9.14.