Once again, chief executive Tufan Erginbilgic has shown determination to drive the recovery of the Rolls-Royce Holdings (LSE: RR) business and share price.
A restructuring announcement on 17 October 2023 led with the headline: “Rolls-Royce to create simpler, more efficient and effective organisation to continue to deliver world class product“.
A focus on operational efficiency
The engine and power systems maker said it plans to deliver better customer outcomes by focusing on efficiency, simplification and enterprise-wide synergies.
And simplification is almost always the best path for any business, as well as for most other pursuits in life.
Unfortunately for those involved, the plan involves reducing the worldwide employee headcount by 2,000-2,500 people. But my guess is the separation terms will likely be generous from a big organisation such as Rolls-Royce.
To put the cuts in perspective, the company currently employs around 42,000 around the world. But bloated personnel costs are an obvious target for many long-established businesses. So the move is perhaps unsurprising. However, it’s not the only lever Erginbilgic and the management team plan to pull.
There’s an overall aim to strengthen the capabilities of the business to ensure operational and commercial skill matches engineering and technical excellence.
And that’s a good mind-model for the directors to use. After all, what’s the point at being great at making leading products if the organisation is rubbish at executing its own business operations?
Many small businesses fall into that trap. And the outcome usually defaults to lower profits.
As an aside, private investors can find themselves in a similar position. An investor can be great at picking stocks, but rubbish at executing the management of a stock portfolio. And that situation can lead to disappointing overall returns.
Combining functions
One high-profile change at Rolls-Royce is that chief technology officer Grazia Vittadini will leave in April 2024. And the director of product development and technology for the civil aerospace division – Simon Burr — will join the executive team “with immediate effect”.
Burr will lead a single team responsible for engineering technology and safety. Previously, those areas were managed separately. But the move to combine the functions is aimed at enabling engineering talent and technology to be used more effectively across the business.
Erginbilgic said the announcement is another step on the firm’s multi-year transformation aimed at building a “high performing, competitive, resilient and growing Rolls-Royce.”
Meanwhile, with the share price near 217p, it’s down from the recent highs near 230p.
But the stock looks perky. And positive news like this is just what’s needed to keep the kettle boiling.
If the company can keep growing its earnings by improving the execution of the business, we may see further progress for the shares.
But one risk is that the forward-looking valuation looks like it’s up with events.
City analysts expect normalised earnings per share to come in around 11p in 2024. And that puts the anticipated earnings multiple just below 20 – around the same figure as expected growth in earnings.
I’d say Rolls-Royce is priced to perfection right now. So new investors won’t be getting the shares on the cheap. Nevertheless, I see the stock as a candidate for a possible long-term buy-and-hold as the turnaround in the business unfolds.
