Rolls-Royce (OTCMKTS:RYCEY) stock closed down 4% today at $1.19 per share. That’s just above its 52-week low of $1.16. Why did RYCEY stock drop so low?
This morning, JPMorgan downgraded the aerospace and defense company from “equal-weight” to “underweight” and lowered its price target to 75 pence. For context, one U.S. dollar is equivalent to about 77 pence or 0.77 British pounds. Analyst David Perry attributed the downgrade to uncertainties surrounding Rolls-Royce’s decision to pursue “electric aero engines and greener fuel options.”
This in mind, let’s jump into the downgrade details. Here’s what investors should know.
Why Is RYCEY Stock Down Today?
When it comes to Rolls-Royce and RYCEY stock, Perry is concerned the company’s switch to electric engines could raise execution risks. Recently, Rolls-Royce has shifted its focus to less carbon-intensive engine options, such as hybrid, electric and hydrogen power. However, the switch to cleaner energy could pose short-term issues. Perry explained, “Most aviation experts believe it will not be possible to have a large commercial aircraft that is powered electrically, at least for many decades to come.”
Like JPMorgan, Deutsche Bank also lowered its price target to 1.10 pounds last week. The firm believes the company’s outlook is “still foggy” due to a low revenue outlook. What’s more, margins may decrease due to “higher utilization of low margin yielding engines (A350/787).”
Currently, Rolls-Royce is working on a small modular reactors unit that has the potential to “replace sustainable aviation fuel.” Last month, a report from Betaville also detailed how the company may soon be involved in a “significant corporate transaction.” The report states an unknown suitor may be in the early stages of a deal “for or with Rolls-Royce.”
If a deal does happen, AJ Bell investment director Russ Mould believes the potential transaction will have a rough regulatory path. That’s because the United Kingdom utilizes the “golden share,” which means that it can veto any deal or transaction it sees fit. A sale or takeover could raise concerns, since Rolls-Royce is involved with issues close to national security. Robert Stallard of Vertical Research Partners has also pointed out the “increasingly protectionist stance of the U.K. Government when it comes to foreign acquisitions.”
With the downgrade and potential transaction in mind, let’s take a look at how the rest of Wall Street views Rolls-Royce.
Wall Street Weighs In on Rolls-Royce
- Bernstein has a price target of 1.33 British pounds with a “market perform” rating.
- Societe Generale has a price target of 97 pence with a “sell” rating.
- Jefferies has a price target of 95 pence with a “hold” rating.
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On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
