Analysts Downgrade Rolls Royce

Weakness in Rolls-Royce's civil aerospace business and its marine division will put pressure on revenue growth and profitably for the second half of 2015 and 2016

Jeffrey Vonk 17 November, 2015 | 2:32PM

We are lowering our fair value estimate for Rolls Royce (RR.) to £6.55 per share from £8.61 as we reduce our revenue and margins expectations. Weakness in Rolls-Royce's civil aerospace business and its marine division will put pressure on revenue growth and profitably for the second half of 2015 and 2016.

We believe the shares are undervalued; but we expect short-term volatility

Rolls-Royce continues to gain market share in installed thrust; as a result, the company should benefit from increased demand for aftermarket services. However, we have begun to see reduced utilisation by some specific operators of older wide-bodied engines. This management of short-term excess capacity, as the market takes delivery of newer, more fuel-efficient airplanes, will affect aftermarket revenue and profit in 2015/16. Nonetheless, we maintain the firm's narrow moat, as the issues are cyclical rather than structural in nature.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Rolls-Royce Holdings PLC220.00 GBX-0.86

About Author

Jeffrey Vonk  is an equity analyst with Morningstar.

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