Rolls-Royce issues another profit warning

This week FTSE 100 engineering giant Rolls-Royce issued its fourth profit warning in less than 18 months. What's gone wrong, and is it worth buying?

Rolls-Royce: locked in a downward spiral?

This week FTSE 100 engineering giant Rolls-Royce(LSE: RR)issued its fourth profit warning in less than 18 months, and halted its half-finished £1bn share buyback programme, just days after new chief executive Warren East took the helm. The company had expected to make £1.4bn-£1.55bn profit in 2015, but it cut its expectations to £1.325bn-£1.475bn.

Advertisement - Article continues below

Low oil prices have hit demand for vessels and rig equipment from its marine division, as oil explorers cut back on investment.The civil aviation unit its largest revenue generator has also been an issue, says Kamal Ahmed on the BBC. The development of the new Trent 7000 jet engine has hit orders for the old model, as customers hold off for the new version. The share price fell by 6% during the day, and by as much as 10% at one point.

There's nothing unusual about a new CEO taking the opportunity to "clean out the stables", says Peggy Hollinger in the Financial Times. What rattled investors is that this doesn't seem to be what East was doing. This latest warning comes off the back of the "hastily declared findings" of a financial review that started before he arrived. As a result, investors don't know what to expect when East completes his own review.

Advertisement - Article continues below

Some analysts are even speculating that the door is open to a fifth profit warning. East acknowledged that there have been "weaknesses in how the business compiles its forecasts", says The Guardian's Sean Farrell. But he also argues that the decision to release the results of the review now shows that Rolls-Royce is "reporting its problems earlier and more clearly than previously". That may be so, and the problems at the marine unit are only to be expected, says the Lex column in the Financial Times. Most oil and gas services firms have had "a rotten year".

But the problems in the aerospace division are more worrying. This is Rolls-Royce's core business it's "what engine makers do". Yet it "is having trouble predicting how that process will go".

Our view

And while there is a lot of upside if East manages to turn the company around, we're not optimistic, given that he was previously a non-executive director in the company. So we'd pass for now until there's more clarity, or the valuation falls further. Overall, there are more attractive options out there.




The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular


These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020
EU Economy

Why a stronger euro is good news for investors

The fragile state of the eurozone has for a long time brought the threat of deflation. But the ECB’s latest moves have dampened those fears. John Step…
5 Jun 2020