Why Rolls-Royce shares dropped in April but GE Aerospace stock surged!

Rolls-Royce shares actually fell by 3% in April amid a flurry of conflicting news stories. Dr James Fox takes a closer look at the engineering giant.

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Rolls-Royce (LSE:RR) shares are up 172% over the past 12 months, but the stock fell 3% in April, marking one of its worst months over the year. However, April was a better period for GE Aerospace (NYSE:GE), one of Rolls-Royce’s peers in the aerospace engine segment. The US-listed stock jumped 16.5%.

No news

April was a quiet month for Rolls-Royce and the company didn’t publish any earnings updates. The last one we had from Rolls was its 2023 results in February. Back then, the aerospace, power systems, and defence manufacturer raised investor sentiment with a stellar report and strong guidance.

There was some volatility in the share price however. The stock dipped early in April as analysts suggested that defence stocks were trading close to their peak valuations. This is often referred to as being ‘priced for perfection’. In other words, there isn’t much margin for error.

Defence represents around 25% of the company’s business. This is a part of the stock market where share prices fluctuate on geopolitical developments.

GE reaches 16-year high

Meanwhile, GE Aerospace announced better-than-expected Q1 earnings in April. The stock’s risen to a 16-year high after the engine maker beat EPS estimates by $0.12 ($0.82 vs $0.70), and raised its guidance for the year.

While civil aviation’s a booming sector right now, analysts have pointed to an unexpected tailwind. Boeing‘s troubles with new aircraft deliveries mean that legacy aircraft are spending longer in the skies and require more servicing.

Interestingly, GE, like Rolls, sells its engines at a loss, but ties operators into lucrative aftermarket servicing contracts. These so-called ‘shop visits’ account for around 75% of the revenue generated during the engine’s lifecycle.

City and Wall Street consensus

So we have two engineering giants in the aerospace, power systems, and defence sectors. But what do analysts think of these two stocks?

Well, Rolls-Royce has eight ‘buy’ ratings, four ‘outperform’, four ‘hold’, and just one ‘sell’ rating. It’s average share price target is just 7.3% above the current share price.

GE Aerospace on the other hand has 12 ‘buy’ ratings, five ‘outperform’, and two ‘hold’. The average share price target’s 11.3% higher than the current share price.

My take

Rolls-Royce was described last year as being “woefully mispriced”. A year later, it’s clearly trading closer to its fair value. It’s currently trading at 23.2 times forward earnings, which compares to GE at 40 times forward earnings.

They’re both expected to grow at roughly the same pace which suggests Rolls is better value. But as we know, US stocks trade at a premium to their FTSE 100 peers.

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.

James Fox has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. 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.

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