See the mighty fallen. When I was a boy, Rolls-Royce was a byword for everything that was smart, efficient, faultless and aspirational. British engineering par excellence. A guarantor of quality, and a smooth ride.
Recent monthshavebeen horriblybumpy ride for anybody holding shares inRolls-Royce Holdings (LSE: RR), whichhave halved in value in the last six months. The stock hasnt just hit a pothole, it has plunged into a sinkhole, having just issued its fifthprofit warning in less than two years. Profits will be towards the bottom of previous guidance, possibly around 1.325bn, with chief executive Warren East identifying headwinds of around 650m next year, which could lead to further downgrades to 2016 forecasts.
Falling new orders are bad enough butI am particularly concerned by the slump in its aftermarket as older engines nearthe end of their working lives. Thisisoften cited as akey reason to invest in Rolls-Royce, asit all but guarantees a secure long-term income stream. Weakeningdemand for Trent 700 enginesand a slump in its marine division due to fallingdemand from offshore oil companies shows that Rolls-Royce is facing problems across the board.
Rolls-Royce still boasts a huge order book and that will tempt some to chancea rideat todays lowly valuation of 7.86 times earnings. Be warned, it may yield 4.36% todaybut there is a fair chance the dividend will be cut. The stock is a car crash and it will take some time to clean up the mess.
BAE Systems (LSE: BA)looks a steady investment by comparison. In the last six months, its share price has fallen just 10%. But there are storm clouds gathering.BAE has just announced that it will cut 371 jobs followinga slowdown in production of its Typhoon fighter jet, aftera delayednew order from Saudi Arabia. This will cut sales revenue from around1.3bn in 2015 to approximately 1.1bn in 2016.
Markets had expected worse, however, and largely shrugged off problems in Australia where BAEs Williamstown shipyard has no new work, leading to more layoffs. Investorsseem willing to accept chief executive Ian Kings view that good sales growth in 2015 and a robust order backlog at the half year of 37.3bn underpins confidence in the future prospects for the business.
On The Defensive
Defence should be a good industry to be in right now, given todays mounting terror threat. NATO members are likely to find it hard to justify further cuts in military spending, whileMiddle Eastern customerssuch as Saudi Arabia and Kuwait are likely to carry on spending. Trading at 11.9 times earnings and yielding 4.5%, covered 1.9 times, BAEsnumbers look decent as well. As does itsrobust order backlog, currently37.3bn.
Rolls-Royce has a healthyorder book as well, but that doesnt appear to have spared it, so nothing can be taken for granted. BAE Systems looks in a relatively stronger position, but these are volatile times.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.