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Why Shares In Rolls-Royce Holding PLC Plummeted

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

Rolls-RoyceWhat: Shares in Rolls Royce (LSE: RR) (NASDAQOTH: RYCEY.US) plunged by 12% to 1066p during early trading this morning, following publication of its final results statement for 2013, in which it forecast flat revenue and profit for the year ahead. Naturally, the dividend was increased by 13% to 22p, adding a nice lick of paint to the bottom of a rusty bucket.

So what: This is the first time in 10 years that Rolls Royce, the world’s second largest aircraft engine maker, doesn’t expect to see revenue growth. The firm reported a 41% drop in net profit as lower demand for defence equipment cut into sales. Before today, the stock had risen 23% over the last 12 months.

Now what: The chief executive, John Rishton, commented:

“Our priorities remain the 4Cs: Customer, Concentration, Cost and Cash. There has been good progress on Customer, particularly with on-time delivery. On Concentration, we continue to focus on our two technology platforms of gas turbines and reciprocating engines.  We achieved a cash inflow of £359m and improved our inventory turns.  On cost, there is more to do.”

The company will continue to look for growth opportunities and expects revenue to pick up again in 2015. Costs will be reduced as the company looks into areas where savings can be made, such as moving production away from high cost countries. Last month the group confirmed it was in consultation over cutting nearly 400 jobs at its Ansty plant, near Coventry.

After this morning’s price movement the shares may therefore trade on a P/E of  16 and offer a possible income of 2%.

The decision to ‘buy’ — based on those ratings, today’s results and the wider prospects for the aerospace sector — is, of course, entirely your decision.

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> Mark does not own shares in Rolls Royce.