Rolls-Royce share price: where next as JP Morgan gives grim outlook?

• Rolls-Royce’s share price expected to fall by more than 50%, says JP Morgan
• The engine maker’s free cash flow is under renewed pressure
• Stronger pound weighs on Rolls-Royce and other UK exporters

Rolls-Royce was the biggest loser on the FTSE 100on Tuesday, with the stock falling 12% amid a dismal outlook, with the company looking to raise £2 billion via disposals after recording a major half-year loss in August.

Rolls-Royce reported a pre-tax loss of £5.3 billion in the six months to June 30, including £1.1 billion in write-offs and impairments, a £2.6 billion loss on foreign exchange hedging contracts, along with restructuring costs of £366 million.

‘The Covid-19 pandemic has significantly affected our 2020 performance, with an unprecedented impact on the civil aviation sector with flights grounded across the world,’ Rolls-Royce CEO Warren East said in a statement.

However, the stock rebounded 6% on Wednesday, only for it to see much of those gains lost as the session played out, with the engine maker trading at 210p per share at the time of publication.

JP Morgan offers distressing outlook for Rolls-Royce

To make matters worse, analysts at JP Morgan downgraded their price target for the stock from 90p to 80p per share, implying a potential downside of -62%.

The US-based investment bank blamed the price target cut on the engine maker’s cash flow coming under renewed pressure, with the company forced to downgrade its 2021 free cash flow guidance by €300 million to €1 billion.

Analysts at JP Morgan also expressed concerns about Rolls-Royce's ability to continue operating due to the severely challenging market conditions and that sentiment seems to be shared by some of the company’s key shareholders, with activist investor ValueAct disposing of all its shares.

Stronger pound adds to Rolls-Royce woes

Sterling continues to push higher this week, with investors seemingly ignoring the fact that Brexit talks between London and Brussels are at a impasse and the prospect of a no-deal exit appears increasingly likely.

However, the stronger pound is less to do with the economic strength of the UK economy and more about the weakness of the US dollar, which suffered another blow after the US Federal Reserve’s Richard Clarida said that a cap on Treasury yields could materialise in the near future.

‘With the Fed laying out a new environment where even a sharp rise in inflation will not stifle their huge stimulus efforts, traders are clearly preparing for a drawn out period of easing as continued by the protracted dollar decline,’ Josh Mahony, senior market analyst at IG, said.

GBP/USD: technical analysis

Dollar strength continued to weigh here as well for GBP/USD, pushing the price back from its latest high, according to Chris Beauchamp, chief market analyst at IG.

‘While the price has dropped below the 50-hour simple moving average (SMA) of $1.3384, it has moved momentum indicators back towards oversold readings, providing the potential for a new higher low and an eventual push higher,’ he said.

‘Further declines bring $1.325 into view, particularly as no-deal Brexit headlines make a return.’

How to trade stocks with IG

Looking to trade Rolls-Royce and other stocks? Open a live or demo account with IG and buy (long) or sell (short) shares using derivatives like CFDs and spread bets in a few easy steps:

1. Create an IG trading account or log in to your existing account
2. Enter ‘Rolls-Royce Holdings’ in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade