Rolls-Royce (LON:RR) shares have taken a dip in recent weeks, with some investors cashing in on their profits following a stellar rally earlier this year. The stock dropped to a low of 445p on Tuesday, a near 9% fall from its peak this year.
Earnings Season in Focus
The recent share price wobble comes amid a wave of industrial earnings reports. Last week, GE Aviation, Rolls-Royce's biggest competitor, delivered strong numbers, reporting a 18% surge in total orders to $11.28 billion. Its revenue also exceeded expectations at $9.1 billion.
Airbus, the world's leading aircraft manufacturer, also released positive figures, delivering 323 aircraft in the first half of the year, generating over 28.8 billion euros in revenue. Despite these positive results, the industry faces ongoing challenges with supply chain disruptions.
Boeing (NYSE:BA), still navigating its recovery strategy following recent setbacks, is expected to publish its earnings on Wednesday. Analyst expectations are muted as the company grapples with its turnaround.
Other industrial giants have performed well this year, with GE Aviation reaching record highs. Similar success has been seen in firms like Safran (EPA:SAF), Lockheed Martin (NYSE:LMT), and Rolls-Royce.
Rolls-Royce: Earnings Under the Spotlight
Thursday will be a key day for Rolls-Royce, the world's second-largest jet engine manufacturer, as it releases its financial results. These numbers will be closely scrutinized for several reasons:
Supply Chain Performance: The results will reveal how effectively the company is managing the ongoing supply chain challenges.
Civil Aviation Impact: The figures will shed light on the company's exposure to recent trends in the civil aviation industry. Many airlines, including Delta Air Lines (NYSE:DAL), United, and Ryanair (LON:RYA), have reported weak performance due to overcapacity and softening demand.
Meeting Ambitions: The results will demonstrate whether Rolls-Royce is progressing towards its ambitious targets set by CEO Tufan Erginbilgiç. He aims for operating profits between £2.5 billion and £2.8 billion, a 165-18% return on capital, and £2.8 billion to £3.1 billion in free cash flow.
To achieve these goals, Erginbilgiç is focusing on cost reduction, efficiency improvements, and core strengths. This includes scaling back ambitious projects like the hydrogen engine initiative. He is also exploring partnerships to re-enter the robust narrow-body jet engine market, which the company abandoned several years ago. Narrow-body aircraft are experiencing growth as airlines embrace a hub-and-spoke model.
Valuation Concerns and Potential Upside
Investors are concerned that Rolls-Royce Holdings has become overvalued after its recent surge. However, valuation metrics present a mixed picture. A discounted cash flow (DCF) calculation by Simply Wall Street suggests that the company is trading at a good value relative to its competitors, currently estimated at 52.4% below its fair value of 935p.
Rolls-Royce also boasts lower valuation multiples than its peers. Its price-to-earnings (P/E) ratio is 15.6, lower than BAE Systems (LON:BAES) at 20.7, Babcock (LON:BAB) at 16, and GE Aviation at 40. Safran has a multiple of over 30, while the FTSE 100 index has an average P/E multiple of 18. In the US, the S&P 500 has a valuation multiple of over 20.
These figures suggest potential upside for Rolls-Royce to close the gap with its peer companies. This will depend on the company's ability to achieve its targets and maintain consistent product quality. The company has faced significant costs in the past due to faulty Trent 1000 engines.
Share Price Forecast
Rolls-Royce shares have enjoyed a strong upward trajectory over the past few years, climbing from below 100p in 2020 to over 440p today. The daily chart indicates a strong bullish run over the past few months. Despite the recent retreat, the stock remains above the 100-day Exponential Moving Average (EMA).
A bullish flag chart pattern, shown in blue, suggests a potential strong bullish breakout. This pattern is characterized by a long flag pole and a rectangular pattern.
As a result, there is a likelihood of a share price rise following the release of earnings on Thursday. If this occurs, the share price could potentially retest its highest point of the year at 490p.
Disclaimer: This article is intended for informational purposes only and should not be considered financial advice. Investing in stocks involves significant risk, and it is essential to conduct thorough research and consult with a qualified financial professional before making any investment decisions.