Rolls-Royce shares slip following broker downgrade
Rolls-Royce shares dipped more than three per cent in early deals this morning after analysts at investment bank Citi downgraded the stock.
The analysts downgraded the FTSE 100 giant from a ‘Buy’ to a ‘Neutral’ rating while increasing the price target from 555p to 641p.
Despite the stock currently sitting at 576p, the analysts said the expected upside was insufficient to maintain a Buy rating.
While Rolls-Royce has had a robust recovery since the pandemic, they noted the stock is now coming close to what they view as fair value.
Rolls-Royce’s outperformance
Rolls-Royce was the FTSE 100’s second-best-performing stock in 2024. Shares in the engineering giant returned more than 90 per cent for the year.
Over the past two years, the shares have skyrocketed by more than 500 per cent and despite the dip this morning, the shares are still up more than 85 per cent over the past 12 months.
The Derby-headquartered giant has benefitted from a recovery in the aviation sector and growing interest in nuclear power, while retail investor interest has propelled its price upwards.
Despite the downgrade from Citi, Rolls-Royce is still rated as a ‘Buy’ by most analysts, with 10 holding an overweight rating compared to just one sell, according to data from the Wall Street Journal.
However, some analysts have agreed with Citi that the firm’s high price was approaching a fair value price.
“We believe that Rolls-Royce needs to further progress on its transformation programme before it can be valued on metrics comparable to General Electric,” said Deutsche Bank analysts in their latest broker note on the company.
Meanwhile, in November, Panmure Liberum said that while the stock had outpaced its price target of 400p, “that is not surprising as the treating process is not linear and, in this case,it is the three-year target which matters.” The broker’s three-year price target for the stock sits at 665p.
Russ Mould, investment director at AJ Bell said: “Stock market darling Rolls-Royce saw its engines splutter after Citi downgraded its rating on the stock to ‘Neutral’ from ‘Buy’ on valuation grounds. Even though Citi raised its price target for the stock, investors appear to have taken the rating downgrade as a signal to lock in some profit.
“Rolls-Royce has been a runaway success for investors in recent years as its recovery story gained traction. The turnaround opportunity is now looking like old news and investors increasingly want to hear about the next phase of the company’s growth, not simply what it is doing to get back on track as that looks to have already happened.”
Engine fire
The downgrade followed news that an Airbus A330 engine burst into flames shortly after takeoff from Atlanta en route to Brazil on the first day of the new year.
After leaving Atlanta airport, at 4,725 feet in the air, the Delta plane’s crew reported one of its Rolls-Royce Trent 7000 Engines had caught fire due to a mechanical issue.
It returned to the airport with a “heavy landing” as passengers disembarked, and fire trucks attended.
This follows a series of tragic aviation incidents around the world, including a crash in South Korea that killed almost 200 people.