The Rolls-Royce (LSE: RR) share price took a fresh dip Friday morning after the aerospace engineer told us the problems it’s been experiencing with its Trent 1000 engines are going to take longer than expected to solve.
Faults with the engines have led to the grounding of a number of Boeing 787 planes, and an accelerated replacement of turbine blades on some engines has now resulted in additional engine removals.
As a result, the target for the return to a single-digit level of grounded aircraft has been delayed until the second quarter of 2020 — the company had originally hoped to reach that goal by the end of 2019.
The share price has been slipping since first-half results were released in early August when the Trent 1000 problems were highlighted as the firm reiterated that, though progress was being made, “customer disruption remains.”
Rolls-Royce had long held an enviable reputation, and investors could rely on it for steady earnings growth and regular dividends. That was until a series of profit warnings shocked the markets and sent the shares into tailspin, and resulted in the unthinkable — it needing a restructuring plan to try to bring about a recovery.
That was always going to be painful, but after a few years of crashing earnings, the turnaround does look like it’s finally coming good. After 2018’s pre-tax loss, there’s a pre-tax profit forecast for 2019 of £568m. At the halfway stage, Rolls-Royce reiterated its guidance for the full year, and shared the latest news of the further Trent 1000 engine delays. It said: “Our guidance for the cash costs of the Trent 1000 Package B and C in-service issues in 2019 and 2020 remains as announced on 6 August 2019.”
Whether analysts are convinced remains to be seen, so I think it’s worth keeping an eye open for any forecast updates. But so far, it doesn’t look as if there’s likely to be a further financial hit at this stage.
Time to buy?
The 12.5% price drop since those first-half revelations begs the question of whether this is a buying opportunity. And it’s not easy to answer.
Even with the shares having slipped, we’re still looking at a forward P/E multiple of 44 based on 2019 forecasts. That’s around three times the FTSE 100 long-term average, but that’s misleading as we’re currently, hopefully, at the beginning of a substantial recovery in Rolls-Royce’s earnings and a renewed period of growth.
In fact, there’s already a 67% EPS rise predicted for 2020, and though it would drop the P/E only as far as 26, if the recovery really is under way, that could come down sharply over the next few years.
Buy what you know
On top of that, my Motley Fool colleague Harvey Jones has pointed out the complexity of the company, saying “investors have long struggled to value what is a sprawling, complex business.”
That’s the big problem for me, that I really don’t know how to work out whether the current share price represents good value or is overpriced. And there are plenty of other FTSE 100 opportunities out there that I find a lot easier to understand.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.