Value investors have patiently been waiting for Rolls-Royce's (RR.) downtrodden shares to bottom out. Judging by the reaction to the embattled engineer's results for the year to December 2015, many believe that moment has now arrived. But we remain concerned about profit and cash generation, and reckon these pressures aren't reflected in a premium valuation of 27 times 2016 forecast earnings, which means the recent share price fillip is likely to prove a suckers' rally.
- Cost-cutting plans
- Encouraging longer-term outlook for engine sales
- Dividend cut
- Free cash flow weakness
- Tough end markets
- Operational dysfunction will take years to tidy up
In terms of the latest reported figures, a 12 per cent drop in constant-currency, underlying pre-tax profit hardly sounds like a recipe for the group's biggest share surge in 14 years. Neither does a halving of the dividend. But that, and the absence of a fresh profit warning following five in the last two years, more than satisfied an audience desperate for any cheer.