Rolls-Royce Holdings (LSE: RR) (NASDAQOTH: RYCEY.US) — provider of what it calls “integrated power solutions” for the civil & defence aerospace, marine and energy markets — has been purring along nicely for years, but now the wheels have come off.
But could this stock still make you rich?
1. By reversing this week’s reversal.
Rolls-Royce has just stunned the market by warning that there will be no growth in sales or profits this year. The stock crashed 14% on the day, wiping almost £4bn off its value. For years, this has been a smooth and shiny operation — now it’s got a dent in its bonnet. Worse, management stands accused of failing to keep the City updated with its problems. Chief executive John Rishton even had the nerve to blame the market, for failing to see the slowdown coming.
2. And defying the sector slowdown.
Worryingly, the worst of the news is largely beyond the company’s control — a sharp drop in defence revenues of between 15% and 20%, as governments cut back on spending. Rolls-Royce has also completed the delivery phase of two major export programmes: Eurofighters to Saudi Arabia and Hawk training aircraft to India. Revenues in its marine division slowed, and while profits at its core civil aerospace division should continue to grow, there will only be a “modest” increase in sales. In his defence, Rishton argued that Rolls-Royce had “defied gravity” by delivering strong profit growth over the past two years despite plunging defence spending in the US and UK. So there is scope for outperformance.
3. By growing next year, and the next.
Despite its troubles, Rolls-Royce still delivered a 23% rise in underlying full-year profits to £1.76bn before tax, with sales up 27% to £15.5bn. Investment is all about looking forwards, rather than backwards, so the bad news inevitably overwhelmed the good. But there were positive signs for the future as well. In his prickly defence of the company’s results, Rishton noted that it is sitting on a record order book of £71.6bn, up 19%. He pointed out that revenues have trebled, orders have quadrupled and profits risen six times over the past decade. Growth will resume in 2015, he said.
4. Finally giving investors a buying opportunity.
Until recently, my biggest qualm about Rolls-Royce is that success made it too expensive, trading at around 22 times earnings. Today, you could buy it at 15.9 times earnings. That’s more like it. If you’ve been looking for an opportunity to take a ride in a roller, this could be it. Just don’t bank too much on the dividend. Despite a 13% rise to 22p, the stock yields just 2.1%.
5. Helping the world to travel.
I was alarmed by reports of Rishton’s post-results analyst meeting, where he came across as testy and arrogant. You can get away with that when your share price is gliding effortlessly ahead, but it can backfire badly when things get more bumpy. Still, no stock offers a completely smooth ride. It may even be a salutory shock, pushing the company into renewed efforts to cut costs. And there are still big markets to aim at, notably travel, with Rolls-Royce’s Trent XWB units powering the new Airbus A350 aircraft. If recent results were just a kink in the road, now could be a great time to hop on board.
Harvey Jones doesn't own shares in any company mentioned in this article.