Jefferies puzzled by crash in Rolls Royce share price - UPDATE

14th Feb 2014 16:27

For analysts at broker Jefferies, to lay the blame for the share price drop in Rolls Royce on Thursday on its weak guidance for defence sales and profits was a 'red herring'. Part of their rationale resided in the fact that even without the company's warning on defence sales and profitability for 2014 their own estimates for the latter - in EBIT terms - were already quite close to the outcome predicted by the company. So then what was the reason for their failure to anticipate lowered guidance (and the sharp drop in the stock's price)? A failure to correctly anticipate currency headwinds and the size of the restructuring bill may have been factors it appears. The average FY13 US$/£ exchange rate was US$1.56/£ compared with the current spot rate of US$1.66/£. Guidance for restructuring costs in 2014 was for an increase similar to last year's, of £37m, something which they had not forecast either. As well, Jefferies admitted it may have jumped the gun when anticipating an announcement on a restructuring of the outfit's energy division. The broker's forecasts for the marine division and civil aerospace seemed to have erred as well. Given that there were so many 'moving parts' they explained to clients that "It will take the cold light of a few dawns for us to fathom out the detail of RR's FY13 results and guidance for FY14."Despite all of the above, they doubted that the firm's guidance on EBIT for 2014 "points to an enduring material reduction in value".As an aside, they also noted that Rolls Royce's fiscal year 2014 (FY14) free cash flow (FCF) guidance of around £780m was not too far below their own forecasts of £891m.Lastly, they held out the possibility that investors might have been trying to 'warn' the company against embarking on wasteful acquisitions.AB