Rolls-Royce share price up 60% as turnaround kicks into gear

CEO Tufan Erginbilgic’s turnaround strategy has driven Rolls-Royce’s share price to a 60% gain so far this year. The former BP executive’s plan is to streamline the business he has described as a “burning platform”. But the streamlining involves job cuts, with a rumoured 3,000 roles on the chopping block. Momentum in the RR share price seems to be flagging, with the stock down over the past month.

• Rolls-Royce share price up 60% this year, but down 4.5% in the past month.
• Up to 3,000 jobs rumoured to be at risk as part of CEO’s strategic review.
• Full-year profits come in at £652m, up from £238m in the previous year.

Rolls-Royce’s [RR.L] share price has revved to a 60% gain so far this year. Fuelling the rise in the stock is a turnaround strategy to improve efficiency at the engine maker. This includes cutting jobs, jettisoning initiatives — notably a carbon capture scheme — and merging departments.

However, the RR share price has slid 4.5% over the past month, closing Friday 9 June at 149.25p. Is the cooling in the stock a buying opportunity, or has Rolls-Royce’s share price flown too high, too fast?

Rolls-Royce share price up on turnaround strategy

Rolls-Royce is expected to cut about 3,000 non-manufacturing staff according to a report in the Sunday Times, although the carmaker has said that no decision has been made and any suggestion was “pure speculation”. The rumoured job cuts would be part of a programme to merge several areas of the business for organisational efficiencies.

This is part of a turnaround strategy led by CEO Tufan Erginbilgic who has described Rolls-Royce’s ways of working as unsustainable and the company as a “burning platform” that needs to be streamlined. Erginbilgic has hired McKinsey consultants to advise on how to improve efficiency, having already jettisoned the company’s carbon capture plans.

Erginbilgic said that Rolls-Royce’s improved financial performance was “reflecting the positive changes from [its] transformation programme” in a trading update published 11 May. The Rolls-Royce boss reiterated full-year underlying operating profit guidance of £0.8bn-£1bn and free cash flow guidance of £0.6bn-£0.8bn for 2023.

A strategic review will be published in the second half of 2023. Any insight from the review will likely impact the Rolls-Royce share price.

Rolls-Royce’s share price flies high in 2023

Year-to-date Rolls-Royce’s share price has soared, easily outgunning the wider FTSE 100. This reverses 2021’s dismal performance, when Rolls-Royce shares dropped over 24% during the course of the year.

Rolls-Royce’s stock rose sharply at the start of February, boosted by the publication of annual results for 2022 that crushed expectations. Underlying operating profit came in at £652m, up from £238m the previous year. This was driven by a surge in business for the Civil Aerospace and Power Systems divisions as international travel demand returned following the pandemic. Net debt came in at £3.3bn, down from £5.2bn at the end of 2021.

Not that it’s been smooth flying for Rolls-Royce this year. India’s Central Bureau of Investigation has accused Rolls-Royce and BAE System [BA.L] of engaging in corruption over the supply of fighter jets to the country. The criminal complaint relates to deals to manufacture BAE’s Hawk aircraft, which uses Rolls-Royce engines, between 2003 and 2012. Rolls-Royce says that the allegations were already disclosed in 2017 when it paid a £494m fine to the UK’s Serious Fraud Office. Another hefty fine could put a dent in the bottom line.

Considering how high Rolls-Royce shares have flown this year, are there more gains? Analysts training the stock have a 160p price target. Hitting this would see a 7.2% upside on Friday’s close.