Rolls Royce Appoints New CEO

Equity analysts approve of the appointment of Warren East as Chief Executive at Rolls Royce, but remain concerned about the corporate strategy

Morningstar Equity Analysts 22 April, 2015 | 4:27PM

Rolls-Royce (RR.) named board member Warren East as chief executive officer, replacing John Rishton, who will retire on July 2 2015. Warren East was CEO of ARM Holdings from 2001 to 2013. Under his leadership we always viewed ARM as a well-run company, and a worthy steward of shareholder capital. Warren has been a nonexecutive director of Rolls-Royce since January 2014. We maintain our narrow economic moat, standard stewardship rating, and fair value estimate of £9.53 per share.

With Rishton at the helm, the company made reasonable capital allocation decisions, shunning lofty acquisitions and protecting returns on invested capital. Additionally, the management team consistently paid a dividend and repurchased shares, reflecting its commitment to returning excess cash to shareholders. For these reasons, we think Rolls-Royce merits a Standard Stewardship Rating.

However, we also expressed our concerns about corporate strategy. Rolls-Royce's management strategically chose to allocate capital and highly skilled labour to develop next-generation wide-body airframe engines at the expense of the narrow-body airframe arena. The firm currently has no narrow-body engine offering, and will not join the party until 2020-30, when new narrow-body platforms are going to be developed.  We believe this will limit sales growth, as the bulk of aircraft deliveries will continue to flow to the narrow-body frames.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Rolls-Royce Holdings PLC108.30 GBX-2.34

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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