Rolls-Royce (LSE: RR) (NASDAQOTH: RYCEY.US) disappointed the markets on 13 February with its 2013 results, and saw its share price slump 13.6% on the day to 1,045p — the shares went on to dip as low as 977p a few days later, but they’ve recovered a little to 1,006p today.
Over the course of 12 months the share price is now down 3% — it had been up more than 20% before the day of the results.
Shock!
So what went wrong, and how does it affect growth prospects for the aerospace and defence engineer?
Underlying revenue was actually up, by 27% to £15.5bn, with underlying pre-tax profit coming in 23% ahead at £1,759m — although reported pre-tax profit dropped 36%. The annual dividend was lifted 13% to 22p per share.
A “pause” in growth
But the killer was chief executive John Rishton’s statement that “In 2014, we expect a pause in our revenue and profit growth, reflecting offsetting trends across the business” — and that’s the first time in 10 years that Rolls-Royce does not expect to see revenue growth.
Back to those growth forecasts — here’s what Rolls-Royce’s recent record looks like, together with the consensus for this year and next:
| Dec | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2009 | 36.7p | +8% | 12.2 | 15.0p | — | 3.1% | 2.4x |
| 2010 | 38.7p | -2% | 16.1 | 16.0p | +6.7% | 2.6% | 2.4x |
| 2011 | 48.5p | +25% | 15.4 | 17.5p | +9.4% | 2.3% | 2.8x |
| 2012 | 59.6p | +23% | 14.7 | 19.5p | +11% | 2.2% | 3.1x |
| 2013 | 65.6p | +10% | 19.4 | 22.0p | +13% | 1.7% | 3.0x |
| 2014* | 68.4p | +4% | 15.0 | 23.1p | +5.0% | 2.3% | 3.0x |
| 2015* | 74.4p | +9% | 13.8 | 25.3p | +9.5% | 2.5% | 2.9x |
* forecast
Those consensus forecasts do date mainly from before the results, and 2014’s EPS predictions are likely to be rerated as flat once new forecasts become available, but what’s the longer term looking like?
Defence decline
We were told that the expected lack of growth in 2014 “reflects a 15-20% decline in Defence revenue, the consequence of well-publicised cuts in defence spending among major customers, and completion of the delivery phase of two major export programmes“.
So that’s partly the general defence market and partly the nature of a business whose income can be peaky and depends on the timing of major projects.
Neither of those is a real long-term worry, and the company did say that “We expect growth to resume in 2015” and “We expect profitability to be stronger in the second half of 2014, reflecting the timing and mix of trading and cost reduction“.
A buying opportunity?
So, is the recent shock a reason to dump Rolls-Royce and run for the hills, or is it an opportunity to buy some oversold shares? I think very much the latter, especially for those with a long-term horizon — although the share price may well remain in the doldrums for a little while yet, and I suspect we’ll need to see how the first half of 2014 goes before there’s a real likelihood of a recovery.
