Analysts Downgrade Rolls Royce

Rolls-Royce's large investments in research and development are a major structural competitive advantage but the void in narrow-body planes is difficult to ignore

Morningstar Equity Analysts 23 December, 2014 | 9:03AM
Facebook Twitter LinkedIn

We are lowering our fair value estimate for Rolls-Royce (RR.) to £9.71 per share from £11.15 following the transfer of coverage to a new analyst. We lowered our five-year revenue compound annual growth rate to 1.9% from 4.6% on lower sales estimates for defense aerospace and marine. Due to strong operational efficiency focus and steady growth of high-margin aftermarket sales, we increased our 2018 terminal exit margins assumptions to 11.2% from 10.3%. We maintain our narrow moat rating as we believe the firm enjoys high switching costs and technology leadership.

Rolls-Royce's large investments in research and development are a major structural competitive advantage that have secured a market-leading position in wide-body aircraft. Still, the void in narrow-body planes is difficult to ignore. Although we see softer demand resulting from lower government spending in 2014-15 hurting defence-related sales, we still believe Rolls-Royce is attractively positioned in this market.

The loss of revenue from equipment deferrals within the defence area can be mitigated by increased service revenue from extended use of the legacy installed fleet. As result of increased engine deliveries in recent years, the installed base of civil and defence engines has grown to 29,000, providing a long-term annuity of aftermarket services revenue.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rolls-Royce Holdings PLC125.44 GBP0.00Rating

About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.