JPMorgan upgrades Rolls-Royce, expects more positive news flow

It said although many headwinds remain, news flow over the next six months is biased to the positive.

JPM said it had been expecting the aerospace and defence group to cut its guidance when it reported last week.

However, this was not the case and management was more prudent with its November 2015 guidance than JPM thought.

Last week, Rolls-Royce cut its final dividend by 50% - the first dividend cut in 25 years – as it announced a drop in full year underlying profit that was not as bad as some had feared.

“We cannot rule out further EPS downgrades if macro conditions deteriorate, and/or certain industry trends deteriorate (eg. the number of parked RR aero engines increases); but this looks much less likely in the next six months,” JPM said.

It said that while RR looks very expensive based on its depressed earnings in the next few years, many investors now appear willing to value the stock on potentially much higher profits towards the end of this decade or early the next.

JPMorgan said the company’s new management was making progress, with financial disclosure and communications with investors and analysts improving.

“A new cost reduction plan is in place; however, we think much greater cost reduction is needed if RR is to achieve its 2020-2025 profit targets.”

At 0944 GMT, Rolls-Royce shares were down 1.7% to 666.32p.