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

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Rolls-Royce Holdings PLC105.70 GBX-1.81

About Author

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

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