Here's Why Goldman Sachs Now Thinks Rolls-Royce Shares Could Surge 55%

Goldman's call sends Rolls-Royce shares higher on Monday.

Rolls Royce Plc  ( RYCEF)  shares surged Monday after Goldman Sachs upgraded the aircraft engine maker to a buy, claiming that improving free-cash-flow could drive the stock 55% higher over the next 12 months. 

"Rolls Royce has the potential to substantially increase FCF between now and 2020," noted Goldman analysts Chris Hallam and Peter Lapthorn. ""We expect company-defined FCF to improve from £120 million ($150 million) this year to £495 million in 2018, £1,018 million in 2019 and £1,547 million in 2020. Our 12m price target of 1030p implies 55% upside and an 8% FCFe yield in 2020." 

 

Rolls Royce shares traded 4.24% higher Monday at 694 pence each by 10:00 GMT, clawing back some of the 9.34% decline the stock suffered last week. 

The Derby, England-based maker of plane engines has struggled in recent years, with earnings dipping 5% since 2006, due in part to a sharp increase capital investment, R&D spending and cash injections to plug a shortfall in the company's pension fund. Goldman argues that spending will now level out, while the company is poised to reap the benefits of cash already sunk into the business. 

"Between 2009 and 2016 Rolls-Royce raised spending on PP&E (property, plant and equipment) from £258 million to £585 million, reflecting in part the building of three major new facilities and the installation of associated equipment required to deal with the ramp-up on engine volumes from Trent 1000 and Trent XWB," wrote Goldman. 

The benefits of that investment should be felt over the next four years, with output capacity likely to grow at a compound rate of 8%, meaning output could climb as much in the next four years as it did in the previous 10 years. 

Rolls Royce will continue to make a loss until probably 2020 on the sale of each of its new Trent XWB engine, which are used on wide body aircraft such as the Airbus A350, but will begin to reap significant new cash flows from its key after-sale services. Aftermarket payments from airlines, which average about $440 per hour of flying could add £782 million to earnings between 2016 and 2020, making it the biggest contributor to earnings growth, Goldman predicts. 

Beyond 2020 the company is also likely to benefit from a significant increase its sterling denominated earnings following last year's fall in the pound in the wake of Britain's vote to leave the EU. "This FX angle we believe supports a normal or expensive valuation multiple being applied to long dated numbers," wrote Goldman.

Paul Whitfield

Source: https://www.thestreet.com/story/14007798/1/rolls-royce-shares-surge-after-goldman-tips-55-gain-for-engine-maker.html

Bull of the Day: Ferrari (RACE)

It’s easy for me to get revved up for today’s Bull of the Day as it makes dream machines. I’m a car guy and there’s something about that prancing horse that does it for me every time. Of course I’m talking about Zacks Rank #1 (Strong Buy) Ferrari (RACE -Free Report) .

I don’t know if being bullish on a stock can land me a great deal on a 488 but I’m going to give it my best shot. So if anybody is listening out there in Maranello, “What about Dave?” Ferrari is the most fabled exotic car manufacturer in the world. They have a rich racing history and create some of the most breathtaking automobiles known to man. I could probably go on for six or seven pages about the Ferrari heritage, its legendary founder and its championship pedigree but what’s important here is the winning team that’s running the company right now.

Last year was a record year for Ferrari. Total shipments reached 8,014 units, net revenues grew 8.8% to 3.1 billion euros. Adjusted EBITDA came in at 880 million euros with margins at 28.3% and new profit was up 37.1% to 425 million euros. These great numbers led analysts to revise their earnings estimates to the upside, giving us the favorable Zacks Rank.

Two analysts have increased their earnings estimate for the current year while one has jacked up their estimate for next year. The bullish shift in EPS has pushed our Zacks Consensus Estimate from $2.32 to $2.61 for the current year and increased next year’s number from $2.49 to $2.89.

These moves have not been lost on investors, who have bid the stock up considerably from its original IPO price. After floundering a bit into the spring of 2016, RACE caught a bid in July with shares near $40. That bid has been relentless, taking the stock to over $66 today. Along the way, the 50-day moving average has provided support on the downside, being tested once in September then again in early November. The stock hit a new 52-week high intraday Thursday February 16, 2017. With margins improving and several special models due out this year, it could be another banner year for Ferrari.

by David Bartosiak 

Source:https://www.zacks.com/commentary/104001/bull-of-the-day-ferrari-race

Fiat Chrysler: 100%-200% Upside Despite The Recent Run-Up

About: Fiat Chrysler Automobiles NV (FCAU), Includes: F, GM

Summary

Analysts still do not believe that Fiat Chrysler will hit its 2018 business plan targets despite the fact that the company has consistently over-delivered on the plan.

Fiat Chrysler is one of the cheapest automakers, yet has the clearest path to improve profitability and is led by the best management team in the industry.

We believe a significant stock re-rating will occur when Fiat Chrysler turns to a net cash position in 12 to 24 months.

Despite the recent rally in the share price, Fiat Chrysler Automobiles (NYSE:FCAU) still offers investors a very compelling opportunity with potential upside of 100%-200% within the next 2 years, while at the same time providing a limited downside due to cheap valuation that already bakes in a recession.

Company presentation and current situation

The company is misunderstood and has been neglected for years by financial analysts who saw in Fiat Chrysler an inefficient European automobiles manufacturer, drowning in debt and over-exposed to poorly performing European markets or to emerging markets with economic difficulties.

We instead believe that Fiat Chrysler is (and has been since the Chrysler takeover) a fantastic special situation, led by the best management in the industry. Following the Chrysler takeover (bought by management basically for free, at 1x FCF), the company has transformed into a global player with various levers to improve the bottom line.

Sergio Marchionne presented a comprehensive 2014-2018 business plan that has always been considered as too ambitious and unachievable by analysts. Yet, 3 years later, the company has consistently executed on the plan, beating consensus at each publication and even raising its already ambitious financial targets.

Strategy, management and progress to date

Under Sergio Marchionne's leadership, and following the Chrysler takeover, Fiat Chrysler has developed clear initiatives to transform into an efficient and global automaker:

• Develop premium and luxury brands Alfa Romeo and Maserati. This helps the company's margin expansion not only by selling higher-margin products, but also by gaining efficiency as these brands will use excess production capacity in European plants. So far, this has been a success as Maserati is now highly profitable and Alfa Romeo expanded its product line and now competes in key market segments.
• Expand sales of existing brands into new markets, particularly by globalizing Jeep and Alfa Romeo. The globalization of Jeep has delivered impressive results, with the brand showing exceptional sales growth.
• Develop platforms and rationalize vehicle architectures and standardize components.
• Focus on cost efficiencies.

All these initiative having the same common goal of expanding margins and improving capital structure.

We also think it is important to stress that Sergio Marchionne is, in our opinion, the best CEO in the industry, with a clear focus on ROIC and performing exceptionally at capital allocation while also being a great operator. He has underlined at several occasions the need of consolidation in the automobile industry (e.g., in his "Confessions of a Capital Junkie" presentation) to achieve better efficiencies and stop the waste of capital to develop similar architectures and systems - a view we share with him, and frankly are quite puzzled that no other auto CEOs seem to agree with him.

Since taking over Chrysler, the company has achieved some impressive results and generated significant value for its shareholders:

• Top-line and bottom-line have both been growing at a fast clip over the past few years, executing on the strategic pillars mentioned above.
• The elimination of the Chrysler's debt ring-fencing provided the company with significant liquidity and lower interest expense.
• Ferrari has been spun-off to generate cash (holding it has rewarded investors well as the decision to increase the production limit of its luxury products generated incremental earnings with almost no additional investments).
• Net debt has recently been significantly reduced.

Despite all of these moves, there is still significant value to be unlocked, for instance, through the sale of the auto parts business, Magneti Marelli. While the plan laid out by Marchionne necessitated heavy investments to refresh existing products and enter new segments, the company's peak in capex is now behind it and investments should significantly be reduced in the next 2 years, allowing the company to generate some $10 billion in free cash flow.

Valuation

Investors are currently paying 6x 2016 EPS and 2x 2018e EPS for Fiat Chrysler. We acknowledge that automobile is a no-moat, capital-intensive industry; yet we do not believe that it makes sense to value automobile manufacturers as if they were going bankrupt - especially best-in-class ones.

Part of the reason for this low valuation is that analysts are worried about (1) the level of debt of the company (which we will develop later), and (2) peak SAAR in the US.