Rolls-Royce continues to roll over amid falling profits

With three profit warnings in three years, what does the future hold for the prestigious engine makers?

Source: Bloomberg

Rolls-Royce may have a reputation for high performance, yet the past 18 months of share price movement has suggested otherwise. With a 40% deterioration from the highs of January 2014, it is worth understanding why this has happened and whether we are likely to regain ground or see further losses.

July saw Rolls-Royce issue yet another profit warning, representing the third in just over 12 months. Coming just a day after the new CEO Warren East took post, there could be no better warning sign of the difficultly that will face his tenure at the firm.

Unfortunately, the efforts of East’s predecessor, John Rishton, are deemed to have been detrimental to the firm. Rishton’s strategic decisions were largely geared towards realigning the firm away from its traditional aircraft engine business.

It did not fare particularly well. This change in emphasis can be added to a long list of factors which have been attributed for recent failings, including low oil prices, a weakening economic environment, defence cuts and more.

Despite this poor performance, there does seem to be some positivity around the corner, with a £76 billion order book ensuring that the firm will be back on form in 2016. Furthermore, the fall in energy costs should impact air passenger numbers, bringing a higher demand for Rolls Royce engines. However, how does this look on the chart?

The weekly chart clearly shows that the share price has been in deterioration over the past 18 months, culminating in a three-and-a-half year low last week. The weekly close below the £7.77 support level was particularly notable and this is going to be crucial going forward as support and resistance.

The 50% retracement of the 2008-2015 bull run lies just below the current price, at £7.67. This provides us with a small area of indecision where the breakout in either direction will give direction for the coming months.

Rolls-Royce weekly chart

The daily chart shows that price is currently testing the £7.77 level as new resistance and this is a great opportunity to gauge exactly what our future direction will look like. Should price hold below that level to push below last week’s low of £7.48 then I would expect to see another strong move lower.

Alternately, should price close above £7.77 on the daily chart, it would point towards a near-term recovery of sorts, where last week’s gap open would be the initial target (£8.56).

I prefer the bearish outlook, and see this current level as a likely bearish inflection point which could lead to another leg lower.

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