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Will Rolls Royce get rolled over?

It’s been a baptism of fire for Rolls Royce new CEO Warren East since taking over in the summer. He’s had to preside over three profit warnings in that time, the last one coming in November sending the share price down even further away from the heady levels of 1,000p at the beginning of last summer, as investors lose faith in a company that continues to be a mainstay of British engineering excellence.

The downgrading of profit forecasts for 2016 proved to be the final straw for some of these investors, but despite all the doom and gloom the company continues to punch above its weight announcing recently a £2bn order for its aircraft engines, and a servicing contract from Norwegian Air, as well as getting the benefit of the recent Iranian order for a number of Airbus aircraft which also have Rolls Royce power plants.

It appears that markets are already pricing in the prospect of another profits warning as well as a possible dividend reduction with the shares back near one year lows. There has also been talk in some circles that management might look to raise extra capital to bolster the balance sheet against further shocks, and to speed up the modernisation process at its key engineering operations around the UK, as well as overseas.

Progress on modernisation has been ongoing for the last few years but the pace has been slower than its peers, which is why the share price has suffered more than most  

Pre-tax profits for 2014 dropped sharply to £67m, and while we’re expected to see a significant recovery in the 2015 numbers to £1.3bn, uncertainty is rising about the prospects for 2016 which has seen pre-tax profits revised down to £750m on revenues of £13.3bn.

The current dividend yield sits at a fairly solid 4.5%, but with a dividend cover of 2.8 the company looks to be in decent enough shape to be able to fund it, which suggests the current worries might be overdone.

Will this week’s trading update call time on the recent share price declines or will we see the share price continue to come under pressure.

The declines aren’t being helped by recent stock market turmoil with the share price at six year lows, and while progress is being made on the modernisation process the trickle-down effect could take some time to take effect.

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Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.