Rolls-Royce is synonymous with classic British luxury cars. But the company no longer makes cars: this unit has been a subsidiary of Germany’s BMW since 2003.
Rolls-Royce still exists as its own company, however. It is primarily an aerospace company that manufactures and maintains high-powered engines. It’s more like General Electric than Ford
.
Shares in Rolls-Royce Holdings (ticker: RR.UK) have surged this year under new chief executive Tufan Erginbilgic in hopes of turning things around after years of underperformance.
Rolls-Royce’s underlying profit rose more than 50% in 2022. The company gets most of its revenue from aircraft engine maintenance and says engine flight hours, a key metric, will continue to rise this year . Flying hours this year are expected to reach 90% of pre-pandemic levels in 2019. They were just 65% of that in 2022.
“Historically, Rolls-Royce has traded at a low valuation to its peers,” say analysts led by George Zhao at Bernstein. “The strong finish of 2022 and 2023 [guidance] could lead to optimism for investors that the company is on the path to better performance and better confidence.”
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London-based Rolls-Royce employs 41,875 people and has a market value of £12.3 billion ($15.1 billion). It develops, manufactures and services power systems, or engines, for land, air and sea vehicles.
Rolls-Royce earns 27.4 times this year’s expected earnings and is valued at a 60% premium to its peers. Shares are up 53% this year to £1.43. The average target price among 12 analysts polled by FactSet is £1.52.
Christophe Menard, an analyst at Deutsche Bank, says the shares could rise to £1.60. That’s based on a prediction that operating profit will rise by around 19%, and that’s without the expected boost from Erginbilgic’s latest push.
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Erginbilgic, who holds dual Turkish and British citizenship, took the helm in January. Rolls-Royce had a difficult pandemic as travel restrictions kept most planes grounded. Predecessor Warren East launched a restructuring program in the wake of the Covid-19 crisis, cutting 9,000 jobs to save costs.
When Erginbilgic started the job, he said the company was in danger of becoming a “burning platform” and that it was the last chance to win back investors. He pledged to focus on efficiency and optimization, and demanded that business care more about profit and loss and less about increasing market share.
Erginbilgic spent more than 20 years at oil and gas giant BP, leading its refining and markets division and overseeing the company’s investments in electric vehicle charging.
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He left BP in 2020 after being rejected for the top job. He told reporters he was attracted to Rolls-Royce because of its global brand and because it was an opportunity to help the company’s transition to a low-carbon future.
The most immediate task for the new CEO is to return Rolls-Royce shares to their former glory. They traded as high as £3.60 in 2014 and were above £3 in May 2019, shortly before the Covid-19 pandemic hit.
Bernstein’s Zhao still sees a risk that the stock could falter if the company can’t follow through on its new plans. Its target price is £1.08, 28% below where the shares are currently trading.
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“We will need clarity on the new goals and strategies,” says Zhao, adding that the company still needs to execute and meet the goals.
“This will take time, with downside risks of false starts,” he says. B
Write to Brian Swint at brian.swint@barrons.com
