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Do the Rolls-Royce Job Cuts Mean It’s Time to Invest In the Company’s Shares?

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While an indisputable negative for those personally affected by Rolls-Royce’s recently announcement employment cull, the restructuring has certainly gone down well with investors. The company’s share price has risen over 8% today on news that the cuts are expected to lead to £400 million in annual savings by 2020. The cost of implementing the radical restructuring has been estimated at a one-off £500 million.

Yesterday the British engineering giant dropped the bombshell that its biggest internal shake-up in 20 years would see the loss of 4200 jobs with the company’s Derby HQ bearing the brunt of the redundancies. With Derby the site of the first Rolls-Royce factory opened 112 years ago the town has been jolted by news that around 10% of management and support positions will cease to exist over the next two years. In total, two thirds of the overall job losses will be in the UK with the remaining quota coming from operations based outside of the country.

In explaining the tough commercial decision, Rolls Royce chief executive Warren East stated that while the company produced ‘world class technology’ it had not been for some time a ‘world class business’ due to ‘too much overlapping activity’. The company has been forced into five profit warnings since 2014 and investors had placed significant pressure on the board and Mr East to demonstrate future sustainability and growth.

Despite today’s significant share price jump does the restructuring leave room for further profits in coming years for those investing online in ISA and SIPPs and wondering if Rolls Royce is again a strong prospect. The board is aiming for an ambitious target of £1 billion in free cash flow by 2020 and 60% growth in return on invested capital within the same time frame. Medium term returns of 15%, currently at 9%, have been targeted.

Challenges facing Rolls-Royce in coming years include the transition into engineering and manufacturing engines for electrically-powered flight, new generation aero-engines and the increased digitalisation of its industry.

The biggest question remaining for analysts following yesterday’s announcement was what exactly Rolls-Royce means by ‘medium term’ with a lack of clarification on the timeline. One unnamed analyst quoted by the Financial Times speculated that it could mean some targets being as far off as five years away from being met.

A majority of analysts still have the company rated as a ‘hold’ but there is plenty of upside potential if judged by the more optimistic share prices targets set at over 40% higher than the current level. This suggests investors would do well to keep a close eye on how quickly progress is made on the ‘medium term’ targets outlined yesterday.

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Paul

The author Paul