The Motley Fool

Why Rolls-Royce Holdings PLC’s Growth Prospects Have Taken A Hit

Rolls-RoyceRolls-Royce (LSE: RR) (NASDAQOTH: RYCEY.US) disappointed the markets on 13 February with its 2013 results, and saw its share price slump 13.6% on the day to 1,045p — the shares went on to dip as low as 977p a few days later, but they’ve recovered a little to 1,006p today.

Over the course of 12 months the share price is now down 3% — it had been up more than 20% before the day of the results.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Shock!

So what went wrong, and how does it affect growth prospects for the aerospace and defence engineer?

Underlying revenue was actually up, by 27% to £15.5bn, with underlying pre-tax profit coming in 23% ahead at £1,759m — although reported pre-tax profit dropped 36%. The annual dividend was lifted 13% to 22p per share.

A “pause” in growth

But the killer was chief executive John Rishton’s statement that “In 2014, we expect a pause in our revenue and profit growth, reflecting offsetting trends across the business” — and that’s the first time in 10 years that Rolls-Royce does not expect to see revenue growth.

Back to those growth forecasts — here’s what Rolls-Royce’s recent record looks like, together with the consensus for this year and next:

Dec EPS Change P/E Dividend Change Yield Cover
2009 36.7p +8% 12.2 15.0p 3.1% 2.4x
2010 38.7p -2% 16.1 16.0p +6.7% 2.6% 2.4x
2011 48.5p +25% 15.4 17.5p +9.4% 2.3% 2.8x
2012 59.6p +23% 14.7 19.5p +11% 2.2% 3.1x
2013 65.6p +10% 19.4 22.0p +13% 1.7% 3.0x
2014* 68.4p +4% 15.0 23.1p +5.0% 2.3% 3.0x
2015* 74.4p +9% 13.8 25.3p +9.5% 2.5% 2.9x

* forecast

Those consensus forecasts do date mainly from before the results, and 2014’s EPS predictions are likely to be rerated as flat once new forecasts become available, but what’s the longer term looking like?

Defence decline

We were told that the expected lack of growth in 2014 “reflects a 15-20% decline in Defence revenue, the consequence of well-publicised cuts in defence spending among major customers, and completion of the delivery phase of two major export programmes“.

So that’s partly the general defence market and partly the nature of a business whose income can be peaky and depends on the timing of major projects.

Neither of those is a real long-term worry, and the company did say that “We expect growth to resume in 2015” and “We expect profitability to be stronger in the second half of 2014, reflecting the timing and mix of trading and cost reduction“.

A buying opportunity?

So, is the recent shock a reason to dump Rolls-Royce and run for the hills, or is it an opportunity to buy some oversold shares? I think very much the latter, especially for those with a long-term horizon — although the share price may well remain in the doldrums for a little while yet, and I suspect we’ll need to see how the first half of 2014 goes before there’s a real likelihood of a recovery.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

> Alan does not own any shares in Rolls-Royce.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.