Rolls Royce shares set to trend lower despite landing US Navy deal

Rolls-Royce continues to see its share price dragged lower, with the stock unable to find support this week despite landing a $115 million deal with the US Navy, as investors grow concerned about the threat of a second wave of coronavirus cases.

Earlier this week, the British multinational engineering company announced that it has secured US Navy contracts for ship engines, propulsion components and services.

‘Rolls-Royce is proud to support the US Navy through an extensive portfolio of engines and propulsion system components, as well as service agreements,’ Leo Martins, Rolls-Royce Defence, program director, US Naval & Coast Guard Platforms, said.

‘Rolls-Royce propulsion equipment is in service around the globe on nearly all US Navy ships and the new agreements reflect continued confidence from the Navy in Rolls-Royce products,’ he added.

Rolls-Royce sees credit rating downgraded by Fitch

On Wednesday, Rolls-Royce suffered a blow after credit ratings agency Fitch opted to downgrade it to from ‘BBB+’ to ‘BBB-‘ given the company’s negative outlook for 2020.

The downgrade reflects weaker than previously expected cash flow generation leading to a greater spike in funds from operations gross leverage for FY20 and FY21 with leverage remaining outside our previous sensitivities into FY22.

The weaker cash flow generation is largely driven by Rolls-Royce expecting reduced profitability from its civil aerospace aftermarket and services, but is also exacerbated by the difficult market conditions experienced in its power systems division.

Fitch also expects that poor trading conditions will result in a working capital outflow for FY20 (as opposed to the positive impact we previously expected for the year), significantly impacting cash burn.

‘The negative outlook continues to reflect the uncertainties of a more extended coronavirus pandemic as well as the uncertain form and timing of a recovery for both aftermarket services and engine deliveries for Rolls-Royce's civil aerospace division,’ Fitch said in a statement.

‘The group continues to face risks to the completion of its fixes to the Trent-1000 engine issues, which increases its business risk profile in the short term.’

Analysts offer wide range for Rolls-Royce share target

The 16 analysts offering 12-month price targets for Rolls-Royce have a median target of 357.50p per share, with a high estimate of 960p and a low estimate of 175p.

Based on the stock trading at 290p at the time of publication, the median estimate implies a potential upside 23.2%, while the high estimate represents 231% increase and the low estimate suggests that the stock could fall by as much as -39.6%.

Rolls-Royce share price continues to struggle in 2020 and while the broader market is making an uneasy recovery, with the FTSE 100 up 23% since dipping below 5000 levels at the end of March, the engineering company has struggled to claw back its losses.

As such, the company’s stock is down 57% year-to-date and looks likely to trend lower over the near-term, with the business being acutely impacted by the coronavirus pandemic.

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