Could BAE Systems plc Crash Like Rolls-Royce Holding PLC?

Rolls-Royce Holding PLC (LON: RR) has run into serious trouble but investors will be hoping that BAE Systems plc (LON: BA) has rather more firepower, says Harvey Jones

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

See the mighty fallen. When I was a boy, Rolls-Royce was a byword for everything that was smart, efficient, faultless and aspirational. British engineering par excellence. A guarantor of quality, and a smooth ride.

Recent months have been horribly bumpy ride for anybody holding shares in Rolls-Royce Holdings (LSE: RR), which have halved in value in the last six months. The stock hasn’t just hit a pothole, it has plunged into a sinkhole, having just issued its fifth profit warning in less than two years. Profits will be towards the bottom of previous guidance, possibly around £1.325bn, with chief executive Warren East identifying “headwinds” of around £650m next year, which could lead to further downgrades to 2016 forecasts.

Rollercoaster Ride

Falling new orders are bad enough but I am particularly concerned by the slump in its aftermarket as older engines near the end of their working lives. This is often cited as a key reason to invest in Rolls-Royce, as it all but guarantees a secure long-term income stream. Weakening demand for Trent 700 engines and a slump in its marine division due to falling demand from offshore oil companies shows that Rolls-Royce is facing problems across the board.

Rolls-Royce still boasts a huge order book and that will tempt some to chance a ride at today’s lowly valuation of 7.86 times earnings. Be warned, it may yield 4.36% today but there is a fair chance the dividend will be cut. The stock is a car crash and it will take some time to clean up the mess.

Stormy Weather

BAE Systems (LSE: BA) looks a steady investment by comparison. In the last six months, its share price has fallen “just” 10%. But there are storm clouds gathering. BAE has just announced that it will cut 371 jobs following a slowdown in production of its Typhoon fighter jet, after a delayed new order from Saudi Arabia. This will cut sales revenue from around £1.3bn in 2015 to approximately £1.1bn in 2016.

Markets had expected worse, however, and largely shrugged off problems in Australia where BAE’s Williamstown shipyard has no new work, leading to more layoffs. Investors seem willing to accept chief executive Ian King’s view that “good sales growth in 2015 and a robust order backlog at the half year of £37.3bn underpins confidence in the future prospects for the business”.

On The Defensive

Defence should be a good industry to be in right now, given today’s mounting terror threat. NATO members are likely to find it hard to justify further cuts in military spending, while Middle Eastern customers such as Saudi Arabia and Kuwait are likely to carry on spending. Trading at 11.9 times earnings and yielding 4.5%, covered 1.9 times, BAE’s numbers look decent as well. As does its robust order backlog, currently £37.3bn.

Rolls-Royce has a healthy order book as well, but that doesn’t appear to have spared it, so nothing can be taken for granted. BAE Systems looks in a relatively stronger position, but these are volatile times.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones 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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »