Roll with it

Important Information

We want to make investing with us simple and straightforward for all of our clients.

Please select your investor type from the options below.

Alternatively you can register or log in to an existing account.

Please note that by making your selection here you are agreeing to the Woodford Investment Management Ltd Privacy Statement and to our Terms and Conditions.

Stephen Lamacraft 22 October 2014 Est. reading: 3 min read

Home > Words > Blog > Roll with it

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.

Chart showing the Rolls-Royce share price and forecast PE (current year) over time

Unfortunately though, this isn’t the first time that Rolls-Royce has disappointed this year, and the magnitude of the latest sell-off appears to reflect the market’s growing frustration with the company’s ability to manage expectations effectively. We have some sympathy with this view. Rolls-Royce is a complex business, but some of its communications this year have posed more questions than they have answered.

However, although the market has clearly focused on the short-term disappointment of last week’s statement, we believe that in so doing, it is ignoring some meaningful long-term positives.

For example, the shares are now more attractively valued than they have been in some time – in PE terms, it hasn’t traded at these levels since 2009. It remains a quality business with superb technology, operating in an industry with very high barriers to entry. It has a substantial long-term forward order book which is the product of a well-executed long-term strategy, years of meticulous product development and a proven business model. In increasing capacity to fulfil the order book it has experienced some growing pains but we remain confident that the business can deliver to the long-term order book successfully and profitably.

In the same statement which caused the shares to slide last week, Rolls-Royce has for the first time provided medium term guidance which comfortably beat market expectations. If it achieves its stated targets for 2018, current earnings forecasts will be way too low. As long-term investors, this is exactly the sort of market inefficiency that we aim to exploit – the market is focusing on the short-term disappointment, whereas we look beyond this to assess the long-term opportunity.

“Don’t sell the skin, until you have shot the bear” is another Norwegian saying, which suggests that premature activity can be a mistake but patience is often rewarded. We do take heed of the market’s reaction last week but, based on what I heard and saw in Ålesund, I am reassured.

What are the risks?

  • The value of the fund and any income from it may go down as well as up, so you may get back less than you invested
  • Past performance cannot be relied upon as a guide to future performance
  • The annual management charge is charged to capital, so the income of the fund may be higher but capital growth may be restricted or capital may be eroded
  • The fund may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits
  • The fund may invest in overseas securities and be exposed to currencies other than pound sterling
  • The fund may invest in unquoted securities, which may be less liquid and more difficult to realise than publicly traded securities

Important information

Before investing, you should read the Key Investor Information Document (KIID) for the fund, and the Prospectus which, along with our terms and conditions, can be obtained from the downloads page or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address 40 Dukes Place, London EC3A 7NH.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland, Tel: +41 21 311 17 77, email: info@oligofunds.ch. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

© 2017 Woodford Investment Management Ltd.
All rights reserved.

By using this website you are automatically agreeing to the Woodford Investment Management Ltd privacy statement