Member Since 8 December 2015
Last Seen: 18 Nov '19
Posted on 1 September 2017, 1:31 PM

Rolls Royce, a hold at the current level with 5% potential of upside

Topics: Analysis
Other Insights on Related Shares: RR..L

Rolls Royce is a Hold at the current level as we see an upside of up to 8% from the current level. The stock finished trading on the London stock exchange at 899p a share on Monday, down by 0.83% compared to the previous close. In terms of technical analysis or charting, the stock has been forming double bottom pattern which indicates that the uptrend shall resume anytime. We expect the stock to bottom out at 880p and fresh buying can be initiated around that level. Currently, the stock has been trading below 20 day moving average (DMA), 50 DMA and above 100 DMA of 925p, 920p and 886p. Clearly, the 100 day moving average would likely to act as very strong support zone for the stock. The immediate resistance would likely be at 970p. Therefore, we would advise traders or investors to buy Rolls Royce once it has bottomed out at around 880p with a target of 960p. The momentum oscillators also indicate the same thing that the stock might correct for a few days, but shall bottom out and be in oversold zone very soon. Hence, traders or investors shall keep an eye at the respective levels and initiate the fresh longs accordingly.

The company announced its half yearly results on 3rd August 2017. Let’s throw some light on the latest financial results of the company. As per the CEO, Warren East, the results showed encouraging year on year progress and the business remains fundamentally strong and well positioned in long term growth markets. The company’s first half 2017 revenue was up by 12% yoy compared to the last year. The company reported profit before tax of £1,941m compared to the loss of £2150m last year. The marine segment continues to face challenging offshore oil and gas markets. However, the company reported good profit growth in civil aerospace and power systems with defense remaining steady.

Earnings Outlook:

Based on the above discussion, the management guidance and our own estimates, we estimate Rolls Royce’s 2017 revenue will be £16.1.0 billion (£14.9 billion for fiscal 2016) and the operating profit will be £563 million (2016 operating profit was £44 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 3.5%. We have revised the estimates post half yearly results. 


We have assumed a conservative EV/Sales multiple of 1.2x, which is slightly below the historical multiple of 1.3 x. Based on this ratio and estimated 2017 sales, we have calculated a stock price target of 963 pence.

We set hold recommendation on Rolls Royce with a target price of 963.


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