Is it finally time to buy Rolls-Royce Holding plc?

Bilaal Mohamed asks whether it’s time to reconsider troubled aerospace giant Rolls-Royce Holding plc (LON:RR).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After hitting the headlines with its 2016 results last month, troubled aerospace and engineering group Rolls-Royce (LSE: RR) seemed to divide opinion on whether the company had indeed turned a corner, or whether it was still too early to see a positive impact from its transformation programme. City analysts will no doubt agree to disagree about the group’s prospects, but what does this Fool think?

Huge loss

Last month the FTSE 100 engine maker made the news when it reported a massive £4.6bn pre-tax loss, blamed on the fall in the value of the pound and a corruption settlement relating to historical bribery allegations. The huge pre-tax loss, which was one of the biggest in corporate history, masked an improvement in the company’s underlying performance, which many believe could signal the start of new era for Rolls-Royce.

Total revenues for the group were up 9% to £15bn on a reported basis, but down 2% to £13.8bn on an underlying basis, reflecting weakness in the marine market, due to the oil-price slump. Underlying pre-tax profits crashed 49% to £813m, compared to £1,432m in 2015. But this was much better than the £685m consensus forecast.

Transformation programme

During the latter part of 2015 the company announced a major transformation programme focused on simplifying the organisation, streamlining senior management, reducing fixed costs and adding greater pace and accountability to decision making. To its credit, management has made a better-than-expected start to delivering its objectives, with savings achieved during 2016 coming in above their initial target of £30m–£50m, at £60m.

During the course of the year the group also identified significant opportunities to drive sustainable cost savings from the business. As a result, savings of £80m–£110m are expected to be delivered in the current year. In total, expected ongoing benefits of all current restructuring programmes initiated over the past three years should reduce costs by around £400m by the end of 2018.

Premium valuation

I believe Rolls-Royce is beginning to turn the corner, with the new CEO taking a pro-active approach to restructuring and reducing costs, as well as aiming to improve business conduct and stamp out bribery and corruption within the organisation. The group is expected to return to profit this year, with City forecasts suggesting a pre-tax profit of £867m, followed by an even better £1.1bn pre-tax profit in 2018. Analysts are also expecting an improvement in underlying earnings for the first time since 2013, with 6% growth expected this year and a 20% increase forecast for the year to December 2018.

So, all-in-all, I think the future looks much brighter for Rolls-Royce, but I still don’t believe it makes for an attractive investment at the present time. Sadly, a premium P/E rating of 24 means the shares are trading well above historical levels, and I believe keen investors should continue to be patient and wait for a better entry point.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. 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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »