After Yet Another Profit Warning, Is It Time To Sell Rolls-Royce Holding PLC And Buy BAE Systems plc And GKN plc?

Shares in Rolls-Royce (LSE: RR) have slumped by nearly 10% at time of writing after the company issued yet another profit warning.

The company blamed continued cutbacks in the offshore oil and gas industry for holding back its marine division, which is now expected to report profits of between £0 and £40m this year. Rolls had been expecting this unit to report earnings of between £90m-£120m for the year. 

What’s more, the company also expects its civil aerospace division to perform below expectations for the rest of the year. Management had been expecting some disruption as the division switched from manufacturing the Trent 700 engine to the new Trent 7000.

However, it is now expected that the impact of reduced Trent 700 deliveries to customers is likely to be “greater than initial estimates“. Additionally, the demand for business jets has lagged initial forecasts for the year, piling further pressure on Rolls’ civil aviation division. 

Further pain ahead?

Overall, Rolls now expects group underlying profit before tax for 2015 to be between £1.3bn and £1.5bn. Previous guidance was calling for underlying pre-tax profits of £1.4bn to £1.6bn.

Unfortunately, it’s likely that this won’t be the last profit warning from the company either. Alongside the slug of bad news reported above, Rolls also revealed this morning that the troubles at its civil aerospace arm will continue into 2016. Softer markets will create a £300m net civil aerospace profit headwind into 2016. 

Time to give up? 

After a string of profit warnings throughout 2014, today’s update from Rolls is extremely disappointing. 

The company has continually disappointed during the last twelve months, and it’s becoming apparent that there are better opportunities out there. Indeed, this time last year, analysts were expecting Rolls to report earnings per share of 73p for 2015.

By the end of last week, earnings estimates had fallen to around 50p per share for 2015 and based on today’s news, this figure could be about to fall further still. 

So, even after today’s declines Rolls looks expensive as it currently trades at a lofty forward P/E of 15.6 and earnings are contracting. 

On the other hand, both GKN (LSE: GKN) and BAE Systems (LSE: BA) look to offer better value for money.

More for your money

GKN has had a slow start to the year. Unfavourable foreign exchange rates, lagging sales at its driveline division and the earlier than expected impact of the step down in the A330 build rate, pushed the company to warn on profits earlier this year. 

However, unlike Rolls, even though GKN’s earnings per share at set to fall around 9% this year, the company trades at an attractive valuation. In particular, GKN currently trades at a forward P/E of 12, falling to 11 next year as earnings growth picks up again. The company currently supports a dividend yield of 2.7%. 

BAE is also facing headwinds in the form of the uncertainty surrounding the Eurofighter Typhoon programme and the pending Strategic Defence and Security Review.

Still, the company’s valuation is highly attractive at present levels. BAE’s earnings per share are currently set to expand 1% this year and a further 6% during 2016. The company currently trades at a forward P/E of 11.6 and supports a dividend yield of 4.6%.

Explosive growth

BAE and GKN are two excellent alternatives to Rolls Royce but one thing these companies lack is growth. 

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Rupert Hargreaves 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.