Rolls Royce looks like an avoid at the current levels. The stock finished trading on the London stock exchange at 846p a share on 24th may. Currently, the stock has been trading below its 50 day moving average (DMA), 100 DMA and slightly above 20 DMA of 860p, 858p and 841p respectively. In terms of charting or technical analysis too, the stock has been forming a downward trend line on the daily charts which further confirms the bearish trend of the stock. However, we expect the downside to continue and traders should avoid initiating any fresh long positions in the stock. The immediate support and resistance for the stock lies at 830p and 870p respectively.
Let’s throw some light on the latest financial results of the company. The company’s chief executive Mr. Warren East commented on the results, “Rolls-Royce made good progress in 2017. Financial results were ahead of our expectations and we achieved a number of important operational and technological milestones, but were impacted by the increasing cost and challenge of managing significant in-service engine issues. The business unit simplification and restructuring programme that we announced this January will drive further rationalisation and is a fundamental step in the journey started two years ago to bring Rolls-Royce closer to its full potential both operationally and financially. We are encouraged by the improving financial performance in 2017 with growing revenues contributing to improved profitability and cash generation. Looking forward, sustaining this improvement and delivering increasing cash flow generation will strengthen our position as one of the world’s leading industrial technology companies”
The company’s FY’17 revenue was up by 6% yoy and underlying profit was up by 25%. The strong growth in profit was driven by contribution from power systems. The company’s free cash flows also improved because of improved profits and good working capital management.
Based on the above discussion, the management guidance and our own estimates, we estimate Rolls Royce’s 2018 revenue will be £17.5 billion (£16.3 billion for fiscal 2017) and the operating profit will be £877 million (2017 operating profit was £1,287 million). Our estimates are conservative and assume 7.5% year-over-year growth in sales and a margin for earnings before interest and taxes (EBIT) of 5.0%.
We have assumed a conservative EV/Sales multiple of 1.0x, which is slightly below the historical multiple of 1.3 x. Based on this ratio and estimated 2018 sales, we have calculated a stock price target of 814 pence.