RR - Rolls-Royce

[Phaceliacapital]

Agree.

[KCLarkin]

Found this interesting tidbit in an article about Jeffrey Ubben:

 

At Fidelity, he rose from analyst to run its defense-aerospace and utilities funds before taking over the value fund.

[KCLarkin]

Neil Woodford (the UK Buffett), has a good summary of the RR thesis:

 

Rolls-Royce remains a quality business with superb technology, operating in an industry with very high barriers to entry. It has a substantial long-term forward order book that is the product of a well-executed long-term strategy, years of meticulous product development and a proven business model. In increasing capacity to fulfil the order book it has experienced some growing pains, but we remain confident that the business can deliver to the long-term order book successfully and profitably.

 

In the same statement which caused the shares to slide, Rolls-Royce has for the first time provided medium-term guidance that comfortably beat market expectations. If it achieves its stated targets for 2018, current earnings forecasts will be way too low. As long-term investors, this is exactly the sort of market inefficiency that we aim to exploit – the market is focusing on the short-term disappointment, whereas we look beyond this to assess the long-term opportunity.

 

This is from November and shares are substantially cheaper now.

http://www.whatinvestment.co.uk/financial-news/shares-and-trading/2473927/neil-woodford-why-iand39ve-been-buying-more-rollsroyce-shares-despite-the-bad-news.thtml

 

 

[rb]

Neil Woodford (the UK Buffett), has a good summary of the RR thesis:

 

Rolls-Royce remains a quality business with superb technology, operating in an industry with very high barriers to entry. It has a substantial long-term forward order book that is the product of a well-executed long-term strategy, years of meticulous product development and a proven business model. In increasing capacity to fulfil the order book it has experienced some growing pains, but we remain confident that the business can deliver to the long-term order book successfully and profitably.

 

In the same statement which caused the shares to slide, Rolls-Royce has for the first time provided medium-term guidance that comfortably beat market expectations. If it achieves its stated targets for 2018, current earnings forecasts will be way too low. As long-term investors, this is exactly the sort of market inefficiency that we aim to exploit – the market is focusing on the short-term disappointment, whereas we look beyond this to assess the long-term opportunity.

 

This is from November and shares are substantially cheaper now.

http://www.whatinvestment.co.uk/financial-news/shares-and-trading/2473927/neil-woodford-why-iand39ve-been-buying-more-rollsroyce-shares-despite-the-bad-news.thtml

 

Rolls-Royce, which is best known as a car company but derives most of its revenue from engineering

 

The author is a moron. The Woodford quotes are still good.

[yadayada]

Some reading material down below. A nice history and analysis. on the company.

 

edit: half way through, and analysis is probably best iv seen in a long time on any company.

2014-06-Volsung-Management-Rolls-Royce.pdf

[KCLarkin]

http://www.marketwatch.com/story/activist-shareholders-move-to-get-rolls-royce-airborne-2015-08-19?siteid=yhoof2

[undervalued]

Why don't you just buy RR in London?

 

I could buy the ADR and it's fairly liquid with no premium - was just easier directly via Schwab.

 

Be careful about ADR fees though. Do you know the annual ADR fee on this one?

 

I've been searching for the ADR fees. I can't find it on BNY ADR website http://www.adrbnymellon.com/dr_profile.jsp?cusip=775781206 nor the prospectus at EDGAR http://www.sec.gov/Archives/edgar/data/862346/000120193511000055/0001201935-11-000055.txt. Did anyone find it?

[rb]

Ok the ADR sponsor is JP Morgan.

 

I think probably the easiest way to find out about the fees is to call them and ask. The number is 1-800-990-1135.

 

Just a heads up for other people here that are looking at the ADRs that there is a corporate action in place where the shares per ADR are changing from 5 shares per ADR to 1 share per ADR. The record date is Aug 20 and effective date is Aug 28.

[wbr]

Some reading material down below. A nice history and analysis. on the company.

 

edit: half way through, and analysis is probably best iv seen in a long time on any company.

 

Thank you!

[nodnub]

Why don't you just buy RR in London?

 

I could buy the ADR and it's fairly liquid with no premium - was just easier directly via Schwab.

 

Be careful about ADR fees though. Do you know the annual ADR fee on this one?

 

I've been searching for the ADR fees. I can't find it on BNY ADR website http://www.adrbnymellon.com/dr_profile.jsp?cusip=775781206 nor the prospectus at EDGAR http://www.sec.gov/Archives/edgar/data/862346/000120193511000055/0001201935-11-000055.txt. Did anyone find it?

 

I feel like I am missing something in all this fuss about ADR fees.  Everything I can find for typical ADR admin fees is on the order of a few cents per share per year.

 

This might be what you need for RR?  https://www.bamsec.com/filing/119380515001291/2?cik=1649568

 

(7)  Charges of Depositary.  The Depositary may charge, and collect from, (i) each person to whom ADSs are issued, including, without limitation, issuances against deposits of Shares, issuances in respect of Share Distributions, Rights and Other Distributions (as such terms are defined in paragraph (10)), issuances pursuant to a stock dividend or stock split declared by the Company, or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or the Deposited Securities, and (ii) each person surrendering ADSs for withdrawal of Deposited Securities or whose ADSs are cancelled or reduced for any other reason, U.S.$5.00 for each 100 ADSs (or portion thereof) issued, delivered, reduced, cancelled or surrendered (as the case may be). The Depositary may sell (by public or private sale) sufficient securities and property received in respect of Share Distributions, Rights and Other Distributions prior to such deposit to pay such charge. The following additional charges shall be incurred by the Holders, by any party depositing or withdrawing Shares or by any party surrendering ADSs, to whom ADSs are issued (including, without limitation, issuances pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the ADSs or the Deposited Securities or a distribution of ADSs pursuant to paragraph (10)), whichever is applicable (i) a fee of U.S.$0.05 or less per ADS for any Cash distribution made pursuant to the Deposit Agreement, (ii) a fee of U.S.$1.50 per ADR or ADRs for transfers made pursuant to paragraph (3) hereof, (iii) a fee for the distribution or sale of securities pursuant to paragraph (10) hereof, such fee being in an amount equal to the fee for the execution and delivery of ADSs referred to above which would have been charged as a result of the deposit of such securities (for purposes of this paragraph (7) treating all such securities as if they were Shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the Depositary to Holders entitled thereto, (iv) an aggregate fee of U.S.$0.05 per ADS per calendar year (or portion thereof) for services performed by the Depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against Holders as of the record date or record dates set by the Depositary during each calendar year and shall be payable at the sole discretion of the Depositary by billing such Holders or by deducting such charge from one or more cash dividends or other cash distributions), and (v) a fee for the reimbursement of such fees, charges and expenses as are incurred by the Depositary and/or any of its agents (including, without limitation, the Custodian and expenses incurred on behalf of Holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection with the servicing of the Shares or other Deposited Securities, the sale of securities (including, without limitation, Deposited Securities), the delivery of Deposited Securities or otherwise in connection with the Depositary's or its Custodian's compliance with applicable law, rule or regulation (which fees and charges shall be assessed on a proportionate basis against Holders as of the record date or dates set by the Depositary and shall be payable at the sole discretion of the Depositary by billing such Holders or by deducting such charge from one or more cash dividends or other cash distributions). The Company will pay all other charges and expenses of the Depositary and any agent of the Depositary (except the Custodian) pursuant to agreements from time to time between the Company and the Depositary, except (i) stock transfer or other taxes and other governmental charges (which are payable by Holders or persons depositing Shares), (ii) cable, telex and facsimile transmission and delivery charges incurred at the request of persons depositing, or Holders delivering Shares, ADRs or Deposited Securities (which are payable by such persons or Holders), (iii) transfer or registration fees for the registration or transfer of Deposited Securities on any applicable register in connection with the deposit or withdrawal of Deposited Securities (which are payable by persons depositing Shares or Holders withdrawing Deposited Securities; there are no such fees in respect of the Shares as of the date of the Deposit Agreement), and (iv) in connection with the conversion of foreign currency into U.S. dollars, JPMorgan Chase Bank, N.A. ("JPMorgan") shall deduct out of such foreign currency the fees, expenses and other charges charged by it and/or its agent (which may be a division, branch or affiliate) so appointed  in connection with such conversion.  JPMorgan and/or its agent may act as principal for such conversion of foreign currency.  Such charges may at any time and from time to time be changed by agreement between the Company and the Depositary.  For further details see https://www.adr.com.

[doughishere]

Not sure if you've seen this.

 

Cool documentary on RR

 

[Picasso]

I can see how Rolls shows half the margins of GE. It looks like their production line is stuck back in the 1990's.

 

You also have a town built around Rolls. Sort of hard to cut jobs or make big organizational changes.

[portfolio14]

I can see how Rolls shows half the margins of GE. It looks like their production line is stuck back in the 1990's.

 

You also have a town built around Rolls. Sort of hard to cut jobs or make big organizational changes.

 

This is interesting. This is almost an opposite take from GreenWood's thesis that RR has lower margins because they mistakenly outsource high value-add operations.

 

Could you elaborate what you mean by "stucking back in the 1990s"? RR's technologies is on par with GE's. You can't use 90s technologies to make state-of-the-art jet engines. So the issue isn't inferior technologies.

[Guest Schwab711]

I can see how Rolls shows half the margins of GE. It looks like their production line is stuck back in the 1990's.

 

You also have a town built around Rolls. Sort of hard to cut jobs or make big organizational changes.

 

This is interesting. This is almost an opposite take from GreenWood's thesis that RR has lower margins because they mistakenly outsource high value-add operations.

 

Could you elaborate what you mean by "stucking back in the 1990s"? RR's technologies is on par with GE's. You can't use 90s technologies to make state-of-the-art jet engines. So the issue isn't inferior technologies.

 

CFM International LEAP (https://en.wikipedia.org/wiki/CFM_International_LEAP) is suposed to have 15% fuel savings over anything else on the market currently. GE/Snecma have already produced ~60 engines for certification and the JV has >5,000 orders (fastest selling jet engine of all-time). They will start commercial production in late-2016 with hopes of fully ramping up capacity by 2018.

 

http://www.geaviation.com/manufacturing/CFM-LEAP.html

 

GE also has new gas turbine engines that are more efficient than anything else on the market.

 

Something to consider. I don't know anything about RR so that's as far as I go.

[rb]

CFM International LEAP (https://en.wikipedia.org/wiki/CFM_International_LEAP) is suposed to have 15% fuel savings over anything else on the market currently. GE/Snecma have already produced ~60 engines for certification and the JV has >5,000 orders (fastest selling jet engine of all-time). They will start commercial production in late-2016 with hopes of fully ramping up capacity by 2018.

 

http://www.geaviation.com/manufacturing/CFM-LEAP.html

 

GE also has new gas turbine engines that are more efficient than anything else on the market.

 

Something to consider. I don't know anything about RR so that's as far as I go.

You're not comparing the same things the CFM LEAP engine is a narrow body engine. Rolls is manufacturing engines for wide bodies (also private and regional stuff) and has no engine that would power planes where LEAP could be an application.

 

If you would like to compare apples to apples you would have to go something like RR Trent XWB or Trent 1000 Vs GEnX

[no_free_lunch]

Historical performance has been reasonably strong.  9-10% growth + a 3% dividend.  So a 12-13% total return.  Nothing too crazy but it's more than a cigar butt.  Probably deserves a PE higher than 11.

 

Year,  Order Book (B Pnd),    Ear Per Share (Pence)

2001 17 20

2002 17 11

2003 19 12

2004 21 16

2005 24 24

2006 26 30

2007 46 34

2008 56 37

2009 58 40

2010 59 39

2011 58 49

2012 60 60

2013 71 65

2014 72 73

2015 74 4

 

[Picasso]

I can see how Rolls shows half the margins of GE. It looks like their production line is stuck back in the 1990's.

 

You also have a town built around Rolls. Sort of hard to cut jobs or make big organizational changes.

 

This is interesting. This is almost an opposite take from GreenWood's thesis that RR has lower margins because they mistakenly outsource high value-add operations.

 

Could you elaborate what you mean by "stucking back in the 1990s"? RR's technologies is on par with GE's. You can't use 90s technologies to make state-of-the-art jet engines. So the issue isn't inferior technologies.

 

Nothing crazy scientific about my view.  But you have some older guy walking 8-15 miles a day to keep inventories stocked and tens of millions of dollars of parts just laying around.  You can just sort of tell that it's not the most lean operation in the world.

 

GE is a large industrial player that spent over $10 billion to vertically integrate a good portion of their aviation business.  There are likely benefits to other business segments that makes those decisions a bit easier.  That won't be the case with Rolls.  The entire market cap on Rolls is $20 billion or so, which makes it hard to compete against the $240 billion GE.  I'm not sure how much a few billion of acquisitions will move the needle since GE is likely to continue doing the same.  Rolls is in major catch up mode right now and each day they stand still GE is moving ahead. 

 

My main question is, what kind of losses will the other 50% of revenue provide in the current energy environment?  I'm not interested in hearing that energy will make a comeback or it's cyclical.  I want to hear a worst case scenario for those divisions and how much capital they'll eat up while the other half of the business is on a tear.  For those who followed the story, Hertz was supposed to take their dominant market shares and do very well.  Instead the equipment rental business didn't do that great and the consolidated numbers have not been that amazing even in a duopoly.  The threat of Uber was a long-term threat for Hertz but the stock has still been crushed despite very good activist investors.  Now you have massive investments by GE in 3D printing and composite blades that can make the next generation from Rolls obsolete. 

 

Rolls is going to snatch away victory from themselves at the finish line if they don't focus 100% on this.  That said, I need to figure out the worst case on the crappy parts of the business.  It otherwise looks like the current price gives a fairly wide margin of safety while I investigate this.

 

I'm no expert in aviation (like most investors I'm sure) so my mile high view of the company may be completely off.

[no_free_lunch]

The CEO, Warren East, was on Barron's "top 30 CEO" list back in 2011 back when he was at ARM.

 

"Not all the products that our CEOs make are so well known. ARM Holdings, the British semiconductor-design company, is hardly a household name, but its chips are found in most cellphones and in Apple's red-hot iPad 2. Under CEO Warren East, ARM, founded in a turkey barn, has developed powerful chips that sip, rather than guzzle, electricity -- ideal for battery-powered devices. ARM has outmaneuvered mighty Intel, whose initiatives outside server computers and PCs have gained little traction. Who says there are no innovative tech firms in Europe?"

 

http://www.barrons.com/news/articles/SB50001424052970204582404576214641280640346

 

ARM is now the chip in almost half of all mobile devices.  East was CEO from 2001 to 2013 so probably deserves some credit for that.  It looks like the stock was about a 10-12 bagger under his tenure.

[rb]

I'm not so gung ho on the CEO. He's done well at ARM but he's not an aviation guy. He may be one those guys who's great no matter where you put him in or he could be mediocre. Only time will tell.

 

The way I see the Rolls aviation business is that you don't need a lot of leadership from the top. I see critical posts like Rolls production is from 90s or something. Can someone post some content that shows the GE plant operate like the starship enterprise or something?

 

Actually no matter the technology involved, both GE and Rolls have huge backlogs on shared as well as exclusive platforms that come with very long term maintenance contracts at ridiculously high margins. How can one not make a lot of money from that?

 

Also by the way based on current back logs Rolls is poised to take quite a bit of market share from GE in wide body. Is that really a sign of obsolete technology?

 

I know it's a lot of fun to throw thoughts around but let's focus on what's going on. There's money to be made.

[KCLarkin]

http://www.gwinvestors.com/2015/08/22/rolls-royce-video-the-perfect-storm/

[60North Investments]

I was trying to buy RR.L options to my IB account but for some reason was unable to do so. Anyone have any idea whether there is some limitation to buying those through IB or was it simply some kind of a one-time error?

[rb]

I was trying to buy RR.L options to my IB account but for some reason was unable to do so. Anyone have any idea whether there is some limitation to buying those through IB or was it simply some kind of a one-time error?

If it's in some sort of retirement account there may be restrictions on derivatives.

 

If it's just a trading account it may not be configured to trade options in London. Check that you are set-up to trade UK and then check whether you are setup to trade options. Also check the "investing objectives" in the account setup. From what I remember in order to trade options I think you need to have either speculation or hedging as objectives.

[60North Investments]

I was trying to buy RR.L options to my IB account but for some reason was unable to do so. Anyone have any idea whether there is some limitation to buying those through IB or was it simply some kind of a one-time error?

If it's in some sort of retirement account there may be restrictions on derivatives.

 

If it's just a trading account it may not be configured to trade options in London. Check that you are set-up to trade UK and then check whether you are setup to trade options. Also check the "investing objectives" in the account setup. From what I remember in order to trade options I think you need to have either speculation or hedging as objectives.

 

Thanks for taking the time rb. It's a "Proprietary Trading Group" account, ie. company's account, there aren't any restrictions on derivatives. I'm buying and selling options monthly, no problems there. And it's also set-up to trade UK options, investing objectives OK as well.

 

No idea what that is about. Maybe I try with me personal account with which I remember trading Tesco options some years back. If anyone has had similar issues, or any idea what this is about I'd love to hear!

[no_free_lunch]

Some comments on RR in the sequoia report.  De-stocking inventory should help with cash-flow the way I see it

We try to be supportive of the companies we invest in, but sometimes we do not agree with the management team. That is what happened at Rolls-Royce. The board has now chosen a new chief executive with whom we are pleased. We have not had a chance to meet him yet, but I was in London last week and met with the board. The strategy seems to be more in line with what we would like to see. We are looking forward to meeting the new CEO. Our initial research on him has been positive.So we are cautiously optimistic, and we continue to think that the core aerospace business at Rolls-Royce is very attractive

..

Another thing that has hurt is that Rolls-Royceis aggressively trying to take inventory out of its system. Rolls had too much inventory because managers were worried about not being able to meet delivery schedules and overdid it on inventory. Nowthey are cutting back the other way.

[jay21]

Some comments on RR in the sequoia report.  De-stocking inventory should help with cash-flow the way I see it

We try to be supportive of the companies we invest in, but sometimes we do not agree with the management team. That is what happened at Rolls-Royce. The board has now chosen a new chief executive with whom we are pleased. We have not had a chance to meet him yet, but I was in London last week and met with the board. The strategy seems to be more in line with what we would like to see. We are looking forward to meeting the new CEO. Our initial research on him has been positive.So we are cautiously optimistic, and we continue to think that the core aerospace business at Rolls-Royce is very attractive

..

Another thing that has hurt is that Rolls-Royce is aggressively trying to take inventory out of its system. Rolls had too much inventory because managers were worried about not being able to meet delivery schedules and overdid it on inventory. Now they are cutting back the other way.

 

It's what this anecdote reveals that is interesting: leaner WC and potentially being tougher on vendors to bring margins up (see their comments on PCP being aggressive in taking profits). It's like an activist might be involved or something.