Rolls-Royce Holdings plc (LON:RR.) defied analyst predictions to release its annual results, which were ahead of market expectations. Results overall were solid, with revenues arriving 7.3% better than analyst forecasts at UK£12b. Higher revenues also resulted in substantially lower statutory losses which, at UK£0.53 per share, were 7.3% smaller than the analysts expected. Following the result, the analysts have updated their earnings model, and it would be good to know whether they think there's been a strong change in the company's prospects, or if it's business as usual. So we collected the latest post-earnings statutory consensus estimates to see what could be in store for next year.
Following last week's earnings report, Rolls-Royce Holdings' 18 analysts are forecasting 2021 revenues to be UK£11.9b, approximately in line with the last 12 months. Rolls-Royce Holdings is also expected to turn profitable, with statutory earnings of UK£0.002 per share. Before this earnings announcement, the analysts had been modelling revenues of UK£11.8b and losses of UK£0.018 per share in 2021. Although we saw no serious change to the revenue outlook, the analysts have definitely increased their earnings estimates, estimating a profit next year, compared to previous forecasts of a loss. So it seems like the consensus has become substantially more bullish on Rolls-Royce Holdings.
The consensus price target rose 7.6% to UK£0.93, suggesting that higher earnings estimates flow through to the stock's valuation as well. There's another way to think about price targets though, and that's to look at the range of price targets put forward by analysts, because a wide range of estimates could suggest a diverse view on possible outcomes for the business. Currently, the most bullish analyst values Rolls-Royce Holdings at UK£1.53 per share, while the most bearish prices it at UK£0.45. So we wouldn't be assigning too much credibility to analyst price targets in this case, because there are clearly some widely different views on what kind of performance this business can generate. As a result it might not be a great idea to make decisions based on the consensus price target, which is after all just an average of this wide range of estimates.
Looking at the bigger picture now, one of the ways we can make sense of these forecasts is to see how they measure up against both past performance and industry growth estimates. We would highlight that Rolls-Royce Holdings' revenue growth is expected to slow, with the forecast 0.3% annualised growth rate until the end of 2021 being well below the historical 0.5% p.a. growth over the last five years. Compare this against other companies (with analyst forecasts) in the industry, which are in aggregate expected to see revenue growth of 5.2% annually. Factoring in the forecast slowdown in growth, it seems obvious that Rolls-Royce Holdings is also expected to grow slower than other industry participants.
The Bottom Line
The most important thing to take away is that the analysts now expect Rolls-Royce Holdings to become profitable next year, compared to previous expectations that it would report a loss. Fortunately, the analysts also reconfirmed their revenue estimates, suggesting sales are tracking in line with expectations - although our data does suggest that Rolls-Royce Holdings' revenues are expected to perform worse than the wider industry. There was also a nice increase in the price target, with the analysts clearly feeling that the intrinsic value of the business is improving.
With that in mind, we wouldn't be too quick to come to a conclusion on Rolls-Royce Holdings. Long-term earnings power is much more important than next year's profits. We have estimates - from multiple Rolls-Royce Holdings analysts - going out to 2025, and you can see them free on our platform here.
However, before you get too enthused, we've discovered 3 warning signs for Rolls-Royce Holdings (2 can't be ignored!) that you should be aware of.
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