Rolls-Royce share price surge contrasts with plunge at Ocado

Rolls-Royce

The “burning platform” has long been extinguished, propelling Rolls-Royce Holdings (LSE:RR.) to a group which is now firing on all cylinders, with the unexpected announcement of a £1 billion share buyback programme lighting a fire under the shares in early trade.

Quite apart from its exposure to military defence products, which has lately come into sharp focus, the group’s Civil Aerospace unit which accounts for half of group revenue is paid on flying hours for its engines, which now exceed pre-pandemic levels when those payments unsurprisingly ground to a halt.

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Amid a turnaround including optimisation and cost efficiencies, the potent combination of the group’s three units, Civil Aerospace, Defence and Power Systems, all of which are making significant strides, has led to a headline set of numbers which should keep investors’ interest on high alert.

Full-year pre-tax profit of £2.29 billion represented an increase of 82% on the prior year, underpinned by growth of 16% in revenues to £17.85 billion. Underlying operating profit of £2.5 billion was not only 51% higher, but was also above the guided range of between £2.1 billion and £2.3 billion, which itself had previously been revised upwards. Contributing to this number were improvements of 79% within Civil Aerospace, 16% in Defence and 40% in Power Systems.

All of this was achieved despite the constraints of supply chain issues for key components which have blighted the entire sector. Rolls-Royce has risen above these challenges while also repairing its balance sheet, which currently shows net cash of £475 million, versus net debt of £1.95 billion the previous year.

The turnaround has enabled the expected reintroduction of the dividend, where a projected yield of 1% is less important at this stage than the statement of management confidence which it displays. Indeed, any lingering doubts on the group’s ambitions were firmly put to rest with the additional announcement of the share buyback, which should lend further support to the shares.

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The accompanying outlook comments are no less ambitious, with underlying operating profit of between £2.7 billion and £2.9 billion expected this year, rising in the mid-term to a range of £3.6 billion to £3.9 billion. Nor does the group see that as the end game, describing the new targets as a milestone rather than a destination.

This extraordinary corporate turnaround has resulted in a gain of 364% since the CEO’s appointment two years ago. In the last year alone, the price has risen by 74%, as compared to a gain of 14% for the wider FTSE100, and the group clearly has undiminished ambitions to maintain the momentum. In the meantime, investor appetite for the stock remains undiminished and the market consensus of the shares as buy will almost certainly remain intact.

Ocado

Ocado Group (LSE:OCDO)’s reputation as a “jam tomorrow” stock is perhaps being slightly eroded, but despite the progress there remains some way to go before the group can declare victory in its previous strategic intentions. 

There are some signs of life within the numbers, which are underpinned by the joint venture with Marks & Spencer Group (LSE:MKS) in the Retail unit, where revenues grew by 13.9% in 2024, Ocado Retail is emerging as the fastest-growing UK grocer, following a focus on its selling prices which is having the desired effect of changing perceptions. More than one million active customers drove order growth of 12.5%. Record levels of sales over the Christmas period underlined the positive trajectory which the retail business is enjoying, which bodes well for overall group numbers.

The Trading Solutions business was one on which the group was originally based but has been little more than a thorn in the side for some time. A mountain remains in changing investor perception, as partnerships with retailers who use its revolutionary robotic technology have simply not been coming through at a sufficient pace to keep up with the necessary investment thus far.

Revenues grew by 18.1% over the year, and there are plans afoot to expend the group’s footprint with the introduction of more Customer Fulfilment Centres, but the overall group numbers unfortunately show the true picture. While an improvement on the £394 million loss the previous year, the current £374.3 million figure does little to move the dial.

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 While the outlook is upbeat, such optimism has tended not to have been delivered in the past, and the growth projections are certainly insufficient to quell the doubts which investors have long since harboured.

The shares are finding few friends in opening trades, with sellers pushing against an open door and the decline adds to a fall prior to this update of 32% over the last year, as compared to an increase of 7.5% for the wider FTSE250. The three-year decline of 75% in the price seems to be increasingly irreversible, and the market consensus of a hold could yet be subject to further negative pressure.