Can Rolls-Royce deliver a pleasant surprise?

Aero-engine specialist Rolls-Royce (RR. L) produces earnings on Thursday 11 March and the report will reveal the depth of the impact the Covid-19 crisis has had on the business. The full-year numbers are expected to contain details of the largest ever outflow of cash that the FTSE 100-listed company has seen in its history.

Rolls Royce earnings – what does the City expect?

Analysts are forecasting that the engineer burned through £4.2 billion in 2020, the main reason why it had to raise £5 billion in funding during the period. Additionally, Rolls-Royce is also expected to reveal an underlying pre-tax loss of £3.1 billion on a 29% drop in annual revenues, taking that number down to £11 billion.

Rolls-Royce has taken a broadside hit by the collapse in air travel caused by the global pandemic. This has seen a slump in its civil aerospace business, which accounts for half of the company’s revenue. Supplying engines is only a part of the business model, the other being the service deals to keep the aircraft flying. The so-called ‘power-by-the-hour’ contracts ground to a virtual standstill at one point in the last year. So what is the company planning to do to address this massive shift in its commercial operations?

Apart from raising that £5 billion, the board has also launched a deep and far-reaching campaign to cut costs, including laying-off 9,000 staff, the majority of whom have already gone. The cut in payroll accounts for around a seventh of the total workforce at Rolls-Royce.

In addition, the board is also negotiating a fire sale of part of the company’s operations. One business on the block is a components manufacturer in Spain, it is hoped that a sale there could bring in £1.5 billion. The issue with shedding parts of a business in a downturn is that, first, the seller has to focus on parts of the operations that are working well, and produce a profit, and secondly, a sale in these circumstances, rarely raises the true value of the operations. It has been a traumatic ride for shareholders.

Rolls-Royce share price – technical analysis

The chart above shows the degree of the coronavirus-driven price destruction. From the pre-pandemic highs, the stock price saw a near 90% slump to the lows of 65p in October 2020. The biggest one-day drop in the company’s history turned on the news of the need to approach the markets for £5 billion of funds. However, for those that continued to drip-feed into the company shares, there has been a 74% recovery from those lows to the current levels of 113p.

Could the release of the full-year earnings move shares in Rolls-Royce?

The chart below shows a more detailed picture. Momentum, as indicated by the MACD, or moving average convergence divergence oscillator in the bottom part of the chart, is showing an improvement, indicating support at current levels. This may all change, though, if earnings come through with a downside surprise.

The levels to watch, from current price action, are shown. Any upside surprise in the release, trading may well see shares move out of the current band between 90p support and 120p resistance. Any candle that takes the Rolls-Royce share price above that level of 120 will then use the upper level of resistance at 134 as the new upside price target. Conversely, a disappointment could well see that 90 level tested, as support, and if that line is broken 65p is then in sight.

In terms of positioning, going into the numbers, if you believe that there will be an upside surprise you would take a long position with a stop-loss just below the 90p support. If, however, you take the view that the company is more likely to publish a disappointment you would go short into the release with a stop-loss above 120p.