The fact that Melrose Industries was the second-worst performer (down 4.2%) tells us that this was a sector-wide concern across aerospace and defence. Both have continued falling today, with Rolls down a further 3%, as I type.

Let’s take a look at what has caused this sudden sell-off.

3 emerging risks

The catalyst was GE Aerospace (NYSE:GE), which yesterday released its Q1 results. Now, the quarter itself looked very solid to me, with adjusted revenue growing 29% to $11.6bn. The engine maker also saw an 87% increase in total orders, to $23bn.

Meanwhile, adjusted earnings per share (EPS) of $1.86 beat Wall Street expectations. Free cash flow increased by 14% to $1.7bn.

However, there were three issues that seemed to spook investors, and might have implications for Rolls-Royce moving forward this year.

First, GE lowered its outlook for global flight departures, saying it now expected growth to be flat-to-low-single digits, down from mid-single-digits previously. This is due to the ongoing conflict in Iran, which is causing major flight disruptions and cancellations across the Middle East. 

Chief executive H. Lawrence Culp, Jr. euphemistically called this a “dynamic geopolitical landscape“.

Second, management warned that the price of Brent crude oil is expected to stay elevated through the third quarter. Obviously, higher fuel costs squeeze the margins of GE’s core customers — the airlines — which leads to cancelled routes and possibly even delayed new orders. 

Finally, even though GE did really well in Q1, it did not raise full-year guidance. Management said it was “trending toward the high end” of its earnings target. So while Q1 numbers were strong, the message underneath was more cautious.

GE said its guidance “does not assume a global economic recession“. All guidance essentially goes out the window if that occurs.

What about Rolls-Royce?

So, where does this leave Rolls-Royce then? Well, we have a rival flagging flight cancellations, surging fuel costs, and potential risk from a global economic downturn. We might therefore see more turbulence when the FTSE 100 company next reports.

Of course, such things are largely out of Rolls’ control, and this is always worth remembering. Cyclical travel demand and left-field events like the pandemic can quickly hurt engine flying hours, which are what drive the bulk of the firm’s revenue.

Adding to the risk is that both stocks still trade at a premium. Rolls’ forward price-to-earnings multiple is around 30, while GE looks very dear at 41.

Taking the long view

While still not cheap, Rolls is certainly getting more interesting after losing over 16% of its value in the past few weeks. Because over the long run, the firm’s growth prospects appear undimmed.

It has a clear opportunity to increase its installed base of engines, including in defence, while its small modular reactor (SMR) business has secured contractual certainty to build Europe’s first SMR fleet. The company also plans to re-enter the narrowbody (single-aisle) market.

Rolls-Royce already forms a large part of my ISA portfolio, so I’m not looking to buy more shares. But for investors who don’t currently hold the stock, I think it’s worth considering as a dip-buying opportunity.

The post Down 9%! Here are 3 dangers that are emerging for Rolls-Royce shares appeared first on The Twelfth Magpie.

To begin, let’s get the numbers straight. To sustainably draw £48,000 annually from investments yielding 5% would need a portfolio worth around £960,000. While that’s a substantial figure, it can be achieved by steadily investing over time — and reinvesting dividends along the way.

Let’s assume an investor is starting with £20,000, and they decide they’re going to contribute £500 monthly in order to help the portfolio grow. Now assuming a 10% annualised growth rate, that portfolio could hit £1m in 26 years.

Of course, 10% might sound like overly strong growth, but it’s achievable. However, investors should be wary that poor investment decisions typically result in losing money. An investor may be able to reach that £1m mark sooner by contributing more to their portfolio, even with a more conservative targeted growth rate.

Making it work

Naturally, the required capital depends on the yield. Higher-yielding investments may reduce the capital needed, but they often come with more risk. A portfolio yielding 6% would need around £800,000 to generate £48,000 annually. However, total return and capital preservation should always be prioritised over yield alone.

Diversification’s also key. The FTSE 100 offers a host of strong dividend paying stocks, but investors should consider various income opportunities when they’re looking to withdraw a passive income from their portfolio. This includes exploring various geographies, not just the UK.

What’s more, doing this through a Stocks and Shares ISA means everything is shielded from taxation. No tax on capital gains and no tax on income.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Investing for growth

Most of us aren’t going to be anywhere near having £1m in our ISAs. So how do we get there? Well, a popular strategy would be to start investing in one or two handpicked stocks each month. This approach strives for diversification but gives investors a chance to beat the market.

Melrose Industries (LSE:MRO) looks like a stock with real potential and worthy of consideration. It’s a supplier in the aerospace industry, with sole source positions on 70% of its sales.

The company doesn’t usually make headlines, but that’s part of the appeal. It’s steadily growing its high-margin aftermarket revenues, and it’s benefiting from many of the supportive trends that have taken Rolls-Royce shares higher in recent years.

The shares are trading much cheaper than giants like Rolls-Royce and GE, even though Melrose’s management expects its earnings to grow at 20% annualised growth in the years through to 2029.

However, challenges remain, including supply chain issues and some hefty net debt. But with a strong business model and clear economic moat, this is a stock that deserves a close look for anyone interested in steady, long-term growth. It’s now my largest holding.

The post How much do you need in an ISA to target £4,000 in monthly passive income? appeared first on The Twelfth Magpie.

No news

April was a quiet month for Rolls-Royce and the company didn’t publish any earnings updates. The last one we had from Rolls was its 2023 results in February. Back then, the aerospace, power systems, and defence manufacturer raised investor sentiment with a stellar report and strong guidance.

There was some volatility in the share price however. The stock dipped early in April as analysts suggested that defence stocks were trading close to their peak valuations. This is often referred to as being ‘priced for perfection’. In other words, there isn’t much margin for error.

Defence represents around 25% of the company’s business. This is a part of the stock market where share prices fluctuate on geopolitical developments.

GE reaches 16-year high

Meanwhile, GE Aerospace announced better-than-expected Q1 earnings in April. The stock’s risen to a 16-year high after the engine maker beat EPS estimates by $0.12 ($0.82 vs $0.70), and raised its guidance for the year.

While civil aviation’s a booming sector right now, analysts have pointed to an unexpected tailwind. Boeing‘s troubles with new aircraft deliveries mean that legacy aircraft are spending longer in the skies and require more servicing.

Interestingly, GE, like Rolls, sells its engines at a loss, but ties operators into lucrative aftermarket servicing contracts. These so-called ‘shop visits’ account for around 75% of the revenue generated during the engine’s lifecycle.

City and Wall Street consensus

So we have two engineering giants in the aerospace, power systems, and defence sectors. But what do analysts think of these two stocks?

Well, Rolls-Royce has eight ‘buy’ ratings, four ‘outperform’, four ‘hold’, and just one ‘sell’ rating. It’s average share price target is just 7.3% above the current share price.

GE Aerospace on the other hand has 12 ‘buy’ ratings, five ‘outperform’, and two ‘hold’. The average share price target’s 11.3% higher than the current share price.

My take

Rolls-Royce was described last year as being “woefully mispriced”. A year later, it’s clearly trading closer to its fair value. It’s currently trading at 23.2 times forward earnings, which compares to GE at 40 times forward earnings.

They’re both expected to grow at roughly the same pace which suggests Rolls is better value. But as we know, US stocks trade at a premium to their FTSE 100 peers.

The post Why Rolls-Royce shares dropped in April but GE Aerospace stock surged! appeared first on The Twelfth Magpie.

• The company reported a £513m profit for the 2021 calendar year, increasing from a £1.97bn loss the previous year
• Rolls-Royce shares may be cheap at current levels when compared with two competitors
• The firm is building an increasingly sustainable business

The release by Rolls-Royce (LSE: RR) of its full-year results coincided with recent market volatility. Indeed, the shares tanked 13% in a single day. The announcement that CEO Warren East will depart the engineering firm at the end of 2022 and that revenue could potentially decline as a result of sanctioned Russian airlines, panicked investors. Looking at the underlying business, however, I’m more optimistic that a spare £1,000 would be well spent on this firm. I own shares in this company and I think now could be the time for me to add more at this bargain price. Let’s take a closer look.  

Recent results and Rolls-Royce shares

Rolls-Royce recently posted its full-year results for the 2021 calendar year. As a current shareholder, I was pleased to see the business swing to a £513m profit, compared to a £1.97bn loss in 2020. This is indicative of a much improved operating environment. Indeed, cash outflow for the period declined massively, from £4.18bn to just £1.44bn. This is a sign that Rolls-Royce shares are stabilising.

Furthermore, the group sold off a number of businesses in 2021, like AirTanker Holdings and ITP Aero, which contributed to expected proceeds of around £2bn. This may go some way to paying down the company’s not insignificant debt pile of £7.88bn.   

Why Rolls-Royce shares are cheap

By looking at the firm’s price-to-earnings (P/E) ratio, we are better able to understand if it is under- or overvalued. Rolls-Royce has a forward price-to-earnings ratio, based on forecast earnings, of 22.27. By comparing this with two major competitors, Safran and General Electric, that register 29.85 and 27.86 respectively, it is likely that Rolls-Royce shares are cheap. It is always worth remembering, however, that future pandemic variants could halt the company’s recovery.

Indeed, Deutsche Bank reiterated a price target of 130p. Furthermore, Berenberg issued a ‘buy’ rating this month with a target price of 160p. With shares currently trading at 101p, I think that the Rolls-Royce share price is going to climb even further.

Building a sustainable business

Recent efforts have focused on expansion into greener technologies. Only in December 2021, the Qatar Sovereign Wealth Fund invested £85m into the company’s plans for small modular reactors (SMRs). These will use nuclear energy to create power and should be added to the grid by 2030.

In November 2021, the firm was also testing electric aircraft in a bid to move the aviation sector to greener forms of power. These tests go hand-in-hand with tests of engines with 100% sustainable aviation fuel, which would be a major step in decarbonising the industry.

With recent results, I’m more convinced that Rolls-Royce shares are coming back. I will be using my spare £1,000 to add more without delay in an effort to increase exposure to exciting sustainability projects.  

The post Should I buy more cheap Rolls-Royce shares with a spare £1,000? appeared first on The Twelfth Magpie.