Edit (23/10/14 08.50am): The word “revenue” was removed from the phrase “medium term revenue guidance”.
To have been invested in Rolls-Royce shares this year has been a painful experience. The shares were particularly weak on Friday last week following an unexpected and disappointing trading update from the company in advance of its Marine Capital Markets day, which I have just attended in Ålesund, Norway. This update was, in effect, a warning that revenue and profit expectations for 2014 and 2015 were too high, with deteriorating economic conditions and Russian trade sanctions to blame.
The Norwegians have a phrase which translates to “it’s no shame to look into the warm spring sun and regret a lost limb”. Bruised by the falling share price but with all four limbs still intact, the trip to Norway represented an opportunity to reflect on the investment case and ultimately reassure myself and the rest of the investment team that it remains valid and compelling.
It shouldn’t be a surprise to anyone that Rolls-Royce is, in part, exposed to the slings and arrows of the global economy – it is still a cyclical business, albeit much less so than it used to be thanks to its aftermarket business (revenues from maintaining its existing base of installed engines). But the extent of the recent deterioration in trading has clearly alarmed the market, as illustrated by the chart below.