Rolls-Royce shares are up 30% in 3 months. Here’s why I wouldn’t touch them today
I’ve been feeling smug ever since I bought Rolls-Royce (LSE: RR) shares on 1 November as they have jumped by a third since then.
It looks like I got my timing spot on, after watching them slide relentlessly for five years or more while waiting for my moment. Or so I thought, until I saw a brutal put down of the FTSE 100 company’s prospects by none other than its brand new boss.
For once I got my timing right
CEO Tufan Erginbilgic began his tenure at the aero engine maker by confronting staff with some uncomfortable truths. He labelled the engineering group a “burning platform” and said “given everything I know talking to investors, this is our last chance”.
He added that Rolls-Royce had “not been performing for a long, long time”, its position was “unsustainable” and Covid was not to blame. Of course, Covid did have a negative impact on revenues, given the collapse of international and long-haul travel, but Erginbilgic doesn’t want staff to use that as an excuse anymore.
Being generous, I would call it tough love. Alternatively, it could backfire badly by sapping morale as job losses loom. He is certainly taking a very different approach to former boss Warren East, who claimed in 2021 that the company was “on track for growth” after a nightmare 2020, when it posted £4bn of losses and axed thousands of jobs.
Despite the recent recovery, Rolls-Royce shares are still down 10.27% over one year and a gruesome 64.85% over five years. I might find myself celebrating a dead cat bounce, unless Erginbilgic can match words with action.
Rolls-Royce isn’t a completely burnt out case. In December, it secured up to $5bn-$6bn in production and $6bn-$7bn in services contracts from the US military. It could also enjoy lift-off as China reopens, which is expected to trigger a sharp recovery in air travel, as Rolls-Royce’s aircraft engines come with lucrative maintenance contract based on miles flown.
Now for the really hard bit
Debt is no longer the worry it was, as it paid down £2bn last year, although it still has £4bn of drawn debt outstanding.
East was widely liked and saved Rolls-Royce from meltdown without turning it into the booming business we would like to see. Erginbilgic has to achieve that, somehow. He can’t rely on his people skills, that’s for sure. Nor can he pin his hopes on yet more cost-cutting, given that East had been doing that for years.
That may boost the group’s wafer thin 4.6% profit margins, but what investors really want is for the company to get on the front foot and start growing again. Its proposed fleet of mini-nuclear reactors is promising, although it relies on the UK government finally getting its energy policy together, so that’s another worry.
I’m delighted I bought Rolls-Royce shares when I did, but I’m in no hurry to top up my holding. I bought them because they had fallen so far they looked cheap. That moment has passed. Now I’m going to wait and see whether its macho new boss will turn this crate round or crash it for good. It’ll be one or the other.
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Harvey Jones has positions in Rolls-Royce Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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