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Rolls Royce Update: The Perfect Storm

Subsequent to Rolls Royce’s investor day, and the incremental “headwinds,” flagged by Warren East, we’ve updated our research on the company. We believe East has been aggressively bearish in his “headwinds,” which are not guidance, and ignore several hundred million in tailwinds the group will experience in 2016. With shares down by 20% since our original research note, which detailed operational initiatives we identified, we believe shares of Rolls Royce represent an outstanding opportunity in the next one, three, five and even ten years.

Click here to read out note on Rolls Royce.

In a Nutshell:

Shares in Rolls Royce (RR/ LN) are down 20% since we first outlined our thoughts on Rolls. The new CEO, Warren East has flagged “headwinds,” the company will face in 2016 in order to set unreasonably low expectations that he can exceed from this point forward. As we’ve previously discussed, Rolls is going through a perfect storm where the legacy high-profit and cash-generative products are winding down, and the more efficient platforms in the Trent XWB and Trent 1000 are ramping up to become the company’s best performing engines in its history. Both of these programs are in a money-losing, cash-burn stage. This will be changing in the medium-term, yet most sell-side analysts and investors have shown they are unwilling to endure the turbulence in the transition, and have sold off shares in this high-quality duopoly to valuation levels more appropriate for auto manufacturers. Yet, engineering a wide-body engine remains one of the most complex engineering feats with very high competitive barriers to entry. Rolls manufactures the most efficient wide-body engine in the world in the Trent XWB, which is why it is doubling its market share in this segment of the industry. Because “visibility,” is low for sell-side analysts, we are getting this iconic business for an incredibly low valuation, and thanks to a depressed consensus, shares of Rolls are poised to do well over the next one, three, five and even ten years. Even perfect storms don’t rage forever.

Rolls Highlights

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This article has been distributed for informational purposes only. Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this article. Persons reading this article should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this article. The author’s opinions are subject to change without notice. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available sources. Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed. Investment accounts managed by GreenWood Investors LLC and its affiliates may have a position in the securities or assets discussed in this article. GreenWood Investors LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of GreenWood Investors LLC.

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