Rolls-Royce shares slump on profit warning

17th October 2014

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Shares in Rolls-Royce (RR) tumbled this morning the company announced it would not return to profit next year.

Despite the FTSE 100 continuing yesterday’s late rally and opening 1% higher at 6,261 this morning, shares in the aircraft engine maker fell, underpinning more general fears about corporate earnings and the global economic outlook.

Rolls-Royce shares fell 82.5p, almost 9%, to 858p after the profit warnings, its second this year. The first was in February when it warned it would be hit by defence cuts in the US and Europe. Shares in the company have fallen by a third this year.

Despite today’s struggles, Jefferies analyst Sandy Morris – who placed a ‘buy’ recommendation and a target price of £14.00 on the shares – remained upbeat about the medium-term prospects for Rolls-Royce.

‘The grapevine has been broadly correct about trading conditions in 2014 becoming more challenging and the outlook for 2015 weakening such that a return to growth in sales and profits is no longer likely,’ said Morris. ‘On the other hand, the medium-term guidance appears to shoot down assertions civil aerospace margins will fall and promises 80% cash conversion. Today’s share price reaction is hard to gauge, but we sense there is net good news here.’

Morris added that Rolls-Royce is ‘still credible’ and ‘we have long regarded the equity story as being medium term – meaning 2017/18 – and did not focus on how it progresses through 2015’.

The woes of Rolls-Royce may prove to be symptomatic of a broader 2015 outlook across corporations,’ said Morris.

‘We concede, however, that the market’s time horizon may well currently be quite short, raising the possibility that positive medium-term guidance is negated by the more cautious guidance for 2015,’ he said.

‘The latter may partly reflect the growing pains Rolls-Royce has cautioned of. For sure, we believe Rolls-Royce will not be alone in expressing caution about 2015. Shooting the first messenger is almost traditional, but we hope for a measured reaction today.’

 

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