The Rolls-Royce share price falls 20%. Here’s why I think the FTSE 100 share can’t be ignored
It’s been a tough four months for investors in Rolls-Royce(LSE: RR). The company has recorded a share price decline of around 20% during that time. Fears surrounding the global growth outlook, as well as geopolitical risks, have weighed on investor sentiment.
In the short run, there could be further falls ahead. But in the long run, the company could offer recovery potential. Is it therefore worth buying alongside another falling stock which released a profit warning on Wednesday?
Disappointing update
The company in question is support services business G4S(LSE: GFS). It released a trading update for the three months to 30 September, with organic revenue of 2.5% being up on the 0.2% growth recorded in the first half of the year. The company delivered strong organic growth rates in security services in North America and Asia, as well as in cash technology solutions. This growth, though, was offset to some extent by lower revenues in Benelux and in conventional cash services.
Looking ahead, the company expects to report profit for the full year which is in line with the previous year. This is somewhat disappointing, and is likely to be the key reason for the stock’s 9% decline following the update.
While G4S may be unable to deliver improving profitability in the current year, it seems to be well-placed to perform well next year. It is expected to post a 12% rise in profit in 2019, with it having a high-quality pipeline according to the update. With its shares trading on a price-to-earnings growth (PEG) ratio of around 1, they could offer growth potential over the long run.
Improving prospects
As mentioned, the Rolls-Royce share price has endured a challenging recent period. Investors seem to be uncertain about the prospects for the world economy, with the potential for further tariffs on imports in countries such as China and the US. Alongside this, the US economy is performing relatively well according to recent GDP figures. As such, a rising US interest rate could lead to a squeeze on businesses and consumers not only in the US, but also across much of the developing world.
Therefore, it is perhaps unsurprising that Rolls-Royce has experienced a share price decline. The company now trades on a PEG ratio of around 0.3, which suggests that it could offer good value for money. It may also continue to benefit from the cost reductions it is seeking to make as it aims to become a leaner and more flexible business over the medium term.
Of course, further share price declines cannot be ruled out in the near term. Investor sentiment may take time to recover. But with the business having the potential to expand its addressable market in civil aviation through new products and being expected to benefit from rising demand for defence products, it could enjoy a period of strong growth in the coming years.
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Peter Stephens owns shares of Rolls-Royce. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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