Back in January I tipped shares in Rolls-Royce (LSE: RR)as a long-term buy at 1,246p.This now looks like an embarrassing mistake, because the company has announced two profits warningssince then.
In hindsight, I can see that saying "buy" back then was a risky thing to do. Rolls-Royce's share price had more than tripled in the previous five years and was trading on a punchy multiple of nearly 17 times forecast earnings. There was little protection against things going wrong.
And go wrong they have. The latest kick in the teeth came last week when the company said that profits would be lower than it had previously thought they would be again!
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City analysts who were expecting earnings per share for this year of 73.7p back in January are now expecting something closer to 65p. A weaker economy and the impact of sanctions on Russia are apparently to blame for the decrease.
Rolls-Royce also gave its thoughts on how profitable its business would be in a few years' time. It tried to reassure investors that it will be making more money then, but it seems the continued promises of 'jam tomorrow' are beginning to wear a bit thin.
The shares were understandably dumped by investors. After all, if management can't predict what profits will be a few months in advance, why should it be able to predict them a few years out?
This meansRolls-Royce should have a decent shotat working out how much money itwill make from new deliveries, spareparts and maintenance work. However,the outlook for products that are sold tomining and energy companies isless certain.
In a mess
All in all, Rolls-Royce is in a mess.It is arguably trying to do too much andthis is detracting from the attractionsof its aircraft engines business.And even this aircraft business isstruggling to match the profitability ofrival General Electric.
So what should you do with the shares?At the risk of looking foolish again,I'd say that they are much better valuenow, given the much reduced ratingof 12.5 times forecast earnings.
The current management looks likeit is skating on thin ice. If it can't sortthings out, then someone else might.Selling off the peripheral bits of thecompany could make Rolls-Royce look alot more attractive to investors.
Verdict: buy
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