Rolls-Royce (RR: LON) reports full-year (FY) earnings on Thursday 24 February.
The numbers will be released on Rolls-Royce's (RR) website (https://www.rolls-royce.com/investors.aspx) and on the RNS at 7am UK time.
The publication has the capacity to move the company’s stock price if, as expected, the news may show that with the recovery in its core business, shares have been pricing in too much negative news.
Who are Rolls-Royce?
Rolls-Royce Holdings Plc designs, develops, manufactures, and services integrated power systems for use in the air, on land, and at sea. The company operates its business through the following segments: Civil Aerospace, Defence, Power Systems, Nuclear Power Generation and Rolls-Royce Electric.
The company’s Spirit of Innovation is the world’s fastest all-electric aircraft, hitting a top speed of 345mph – well over 100mph faster than the previous world speed record over a 3km distance. Additionally RR’s Civil Aerospace segment offers commercial aero engines and aftermarket services.
Is the recovery fully underway?
Covid-19 was a low point in RR’s history. Airlines were grounded, staff were furloughed, the service business dried up and almost all avenues of progress were shut down. However, Warren East, the chief executive officer, continues to forge ahead with the new structure. Traders should be on high alert for any updates the company provides.
What can we expect RR to tell us?
At the third quarter (Q3) trading update, RR announced that it continues to benefit from cost reductions and market recovery reflected in improving free cash flow.
RR’s restructuring programme, launched in May 2020, was reported as on track to deliver sustainable cost savings more quickly than initially anticipated, and positions the company well for the £1.3 billion savings target by the end of 2022. By the time of the publication of its FY report, RR expected to have removed more than 8500 positions from across the business, just short of the 9000 it targeted in May 2000, from its 52000 workforce. That pace of reduction is said to be running ahead of its original plan.
Operationally, RR confirmed to the markets that free cash flow in FY 2021 is expected to be better than previous guidance of £2.0bn. Add to this the disposals announced, with proceeds totalling around £2.0bn, and the balance sheet should show that the business is in better shape than it has been for some time. Traders should look for further improvements and also announcements around a new area for Rolls Royce of nuclear power generation.
Moving into nuclear power
An announcement was made by the company, during the last year, that it was moving into the area of nuclear power generation. The search for nuclear sites to support a UK fleet of small modular reactors (SMRs) looks set to begin, with Rolls-Royce and the Nuclear Decommissioning Authority (NDA) preparing to open talks about leasing disused sites.
Last year, the government pledged £210 million in funding to the development of the new Rolls-Royce SMRs, matched by private sector funding of over £250mln. This could be an interesting area to watch out for in the chief executive's report.
RR earnings – the numbers
According to Refinitiv, traders and investors should expect earnings per share (EPS) of 2p on revenues of £11.65bln. In its interims that revenue number was £5.2bn, so it would seem to be clear that the second half has been more active for the business. Of that revenue number, in H1, 56% of total sales came in from after-sales services.
How to trade the chart
This first chart shows the long-term, in monthly candles, going back to June 2003.
It highlights the massive destruction in value from the January 2014 record highs in the stock at £12.93, to the lows at just 64p in October 2020. That drop represented a 94.98% collapse in the company’s value.
The vertical blue dash line is the point at which Covid-19 struck and shows the price action as RR told investors repeatedly that with the grounding of aircraft, its main business unit, the aero engine manufacturing operations and service business, would result in losses for the group.
Where does the share price go from here?
This second chart utilises daily candles and clearly shows the higher lows achieved, since the 86p level on 19 July 2021, and the lower highs since that 150p level achieved on 9 November 2021.
This brings about a symmetrical triangle pattern. Symmetrical triangles are usually traded as continuation patterns, that is the exit is usually in the same direction from which price action took you into the set-up.
However, in this chart there is little or no discernible entry direction so we must wait for a new direction to be established when the breakout occurs. How far the move goes, when a breakout happens, is determined by the height of the triangle where the highs and lows were first established.
For this purpose the orange line is used as the height of the triangle and the breakout points are placed on the day the news is due: Thursday 24 February.