Rolls-Royce Holdings (LSE: RR) caught investors by surprise this afternoon, with news of a restructuring plan that will cut 2,600 jobs, and the sudden departure of its long-serving chief financial officer, Mark Morris, who had been with the company for 27 years.
Rolls’ share price bounced nearly 2% higher following the announcements, but there are still some questions to be answered.
Job cuts at what cost?
Rolls says that its decision to cut 2,600 jobs over the next 18 months is part of “an intensified programme” to cut costs across the group.
The majority of these roles are in the firm’s aerospace division, and while no specific details were given, the company did say that organisational changes, new technology and the end of two major aero engine development programmes all provided opportunities to decrease headcount.
Although it is inevitable that more modern manufacturing facilities require fewer staff, my concern is that some of these job cuts may reduce the firm’s R&D capacity, which is essential for future earnings growth.
Rolls denies this, and says that the restructuring will cost around £120m over two years, and will generate annual savings of £80m per year once complete.
Sudden boardroom change
When a senior executive director leaves a company without warning, it often indicates a problem. According to the FT, when questioned, Rolls-Royce refused to provide any comment on the sudden departure of chief financial officer Mark Morris, except that it was his decision to leave after 27 years.
Interestingly, however, the firm appears to have had a candidate waiting in the wings: Mr Morris has been replaced immediately by David Smith, who joined Rolls as chief financial officer of its aerospace division earlier this year.
Of course, it could be that Mr Morris’ decision to leave is a personal matter, but it might be that his departure is a sign that there is further bad news in the pipeline.
Market reaction to the news was positive, and Rolls-Royce says that the impact of the job cuts is already partially in its 2015 guidance, suggesting that the firm’s 2015 forecast P/E of 13.2 remains reasonably reliable.
However, I think the Rolls-Royce’s stalled growth may yet result in the firm’s shares falling below 800p. Personally I’m targeting a buy price of around 750p, which would give a less demanding forecast P/E of around 11, and a solid 3.3% yield.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.