Is there trouble in store for Rolls-Royce Holding plc, Smith & Nephew plc and Inmarsat plc?

Shares in Rolls-Royce Holding plc (LON:RR), Smith & Nephew plc (LON:SN) and Inmarsat plc (LON:ISAT) are down today, but things could get much worse.

| 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.

Shares in engineer Rolls-Royce Holdings (LSE: RR) fell by nearly 6% this morning after the group’s new chief executive, Warren East, said that 2016 would be “a challenging year”.

Mr East’s comments were made in the firm’s AGM statement. Reading this has left me uncertain about the outlook for the firm. Although Rolls said that trading so far this year has been in line with expectations, the group warns that profits will be “significantly weighted towards the second half” of the year. Relying too heavily on a better second half is often risky, as hoped-for improvements don’t always arrive.

Looking on the bright side, Rolls also said today that if exchange rates remain stable for the remainder of the year, pre-tax profits may be £50m higher than expected. The firm also says that it’s on track to deliver cost savings of £30m-£50m this year.

My view is that the market reaction is probably correct. It’s too early to deliver a verdict on Rolls’ turnaround, but on a 2016 forecast P/E of 25, the shares aren’t obviously cheap. They could fall further.

A limping performance

Rolls’ marine division has been hit hard by the downturn in the energy market. A more surprising casualty of the oil crash is medical technology firm Smith & Nephew (LSE: SN), which makes replacement joints.

Smith & Nephew said this morning that sales in emerging markets fell by 6% during the first quarter as a result of a significant slowdown in China and “in oil-dependent Gulf states”. The firm’s shares were down slightly in early trading, but the news wasn’t all bad.

The company reported a 6% rise in sales in established markets, with the US up 8%. Underlying group revenue rose by 4% to $1,137m compared to the same period last year. Despite this, I’m not sure now is the best time to buy. Smith & Nephew shares currently trade on 19 times 2016 forecast earnings, but broker forecasts for 2016 have been cut by nearly 10% over the last 12 months.

I’m also concerned about falling profit margins, as the group’s operating margin has fallen from 20.4% in 2012 to just 13.6% in 2015. I believe there’s better value elsewhere in the pharma sector.

Oil troubles have hit this firm too

The wider impact of the oil slump is becoming more and more visible. Rupert Pearce, chief executive of satellite internet provider Inmarsat (LSE: ISAT), said this morning that the firm is seeing a “sustained recession in global maritime and energy markets”.

A reduction in offshore oil activity and high levels of ship scrappage are reducing demand for the firm’s internet services. As a result of this downturn, Inmarsat has cut its revenue guidance for 2016 by $50m to a range of $1,175m-$1,250m.

Given that revenue only fell by $6.2m during the first quarter, the scale of this reduction suggests to me that conditions may continue to worsen as the year progresses.

Inmarsat’s share price is down by 5% so far today, and has fallen by 22% so far in 2016. Despite this, the firm’s shares still trade on a 2016 forecast P/E of about 28. In my view, the worsening outlook makes this too expensive.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Black man sat in front of laptop while wearing headphones
Investing Articles

2 of my most amazing buys from the FTSE 100 for passive income

The FTSE 100's home to a number of exceptional shares offering the prospect of handsome income. Here are two to…

Read more »

Investing Articles

1 AI stock to buy and hold for 10 years

AI spending's expected to soar in the next decade, according to most experts. Here's one stock to consider buying to…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Dividend deals! 2 passive income stocks that still look undervalued

Royston Wild explains why these FTSE 250 passive income stocks might STILL be too cheap to miss, despite theirrecent price…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Is BT Group one of the FTSE 100’s greatest value shares?

BT's share price looks like a bargain when you look at the P/E ratio and dividend yield. Is it one…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

The National Grid share price just plunged another 10%. Time to buy?

The National Grid share price is one of the FTSE 100's most stable, and nothing much happens to it? Well,…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Up 15% in 3 months, but I still won’t touch Vodafone shares with a bargepole

Harvey Jones has been shunning Vodafone shares for years. The FTSE 100 stock is finally showing signs of life, but…

Read more »

Growth Shares

This UK stock could be like buying Nvidia in 2021

Jon Smith thinks he's missed the boat with Nvidia shares, but flags up a UK stock that has some very…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The FTSE 100’s Intertek delivers a bullish update — can the share price soar?

I’d describe Intertek as a quality business with a decent dividend income, but will the share price shoot the lights…

Read more »