Is [RR] Rolls Royce Holdings plc a good purchase right now?

Rolls Royce Holdings plc

When I log into my trading brokerage account i’m presented with a list of the ‘most popular’ stocks traded by their clients. [RR] Rolls Royce Holdings plc is always there with around 4 million shares being traded each day.

This UK engineering company who today specialise in designing, manufacturing and distributing power systems for the aviation sector (amongst other industries) are a bread and butter UK staple for many investors and traders.

Trading at £9.30 a share with an £0.11p annual dividend, I took a look at [RR] Rolls Royce today to see whether they would be a suitable candidate for the CLEAN Watchlist, and in turn begin the search for mechanical systematic buy signals.

Low Gross Margin

Upon review of the financials I was disappointed to see the low gross margin numbers. Typically [RR] Rolls Royce Holdings plc are posting around 20% gross margin per year since 2008. This is too low for me. It is too small a slice of the revenue coming in.

What also caught my eye was the past 4 years which have each seen an consecutive drop in gross margin. 23.9% in 2015, 20.4% in 2016, 16.4% in 2017 and in last years 2018 annual report a margin of only 7.6%.

Indeed a trend in the wrong direction. Any company taking an ever decreasing slice of the yearly turnover rings alarm bells for me.

High R&D

I always expected a company like [RR] Rolls Royce Holdings plc to have higher than average R&D expenses. However, these expenses are not only too high for me at 20% on average per year since 2008. But in the last 4 years the R&D costs have risen from 25% in 2015, 30.1% in 2016, 34.8% in 2017 and in last years report 64.1% of the gross profit was spent on research and development. Not only is it too high, but it’s growing at a very fast rate.

Astronomical Interest on Debt

I won’t dwell on this, but 392% interest of operating profit being spent on interest on debt is mental. This happened in 2008. Since then we’ve seen 103% in 2014 and even a 6406% in 2016. Not for me thanks.

Lack of Consistency

The main issue I have here is the overall lack of consistency in performance. This may be normal for a business like [RR] Rolls Royce Holdings plc, but when you deduct the extraneous sales of assets and one off sales that are not a part of their everyday recurring revenue, you start to see a truer picture than what the first few pages of the glowing annual report suggests.

I’m not a fan of any company that can achieve a -27% net earnings followed by a 17% net earnings and then again by a -17% year.

This lack of consistency in results causes too much unknown for me. Almost every company in the watchlist is super consistent with their results and the way they invest their surplus funds. This massively increases the likelyhood of strong share price growth in the coming years. It doesn’t guarantee it, but it does improve our chances. We look for long signals on these companies and reduce the chances of experiencing losing trades.

[RR] Rolls Royce Holdings plc are no such company. I could not invest nor trade in any company that can post such volatile and inconsistent results year on year. Add to that the above concerns on diminishing margin and increasing R&D. Plus the worries on the extremely volatile interest on debt costs. It all points to [RR] being a million miles away from a company i’d look for long signals on.

There are far better companies to put your money in if you’re looking for a return on investment.

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About Chris Chillingworth

Self confessed lover of racing, american football and whiskey. Trader and Investor since 2011. Chris has now coached over +1500 traders using his mechanical systematic trading strategies and now also runs a members only watchlist of FTSE stocks.

View all posts by Chris Chillingworth

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