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It’s not exactly big news that Rolls Royce (LSE:RR.) shares are in decline. They have been nearly every day for more than a month. On 27 April shares were near their 52-week high (1,069.00) at 1,054.00. By 01 June, the declining share price intersected its 50-day moving average at 998.42 before closing at 997.50. From that point the decline accelerated, falling to 890.00 on 01 July its lowest price since 21 January.
Over the past five calendar days, the stock has been in free-fall, trading for most of the day below 800.00 before closing out the day at 803.00, remaining slightly above its 52-week low of 771.90. Trading volume was six times the average of 5 million shares.
What Happened?
At first blush, it might look like the decline coincided with the appointment of Warren East, former head of ARM Holdings (LSE:ARM) as the new RR CEO. That would, however, be absurd. The reason for the co-incident was the reason that East was brought on board. Successive profit warnings, reductions in orders, and an SFO investigation into bribery and corruption in the company’s dealings in China and Indonesia are what prompted both the decline in share price and Mr. East’s appointment.
This morning, the company issued yet another warning that clearly precipitated today’s decline. Not only did East say in the report that, “I am clearly disappointed by today’s announcement and the impact this will have on our investors and employees,” but he also masterfully understated his position telling reporters, “It goes without saying that this isn’t exactly what I had planned for as my first communication.”
What Now?
Actually, East did exactly what he should have done – something that others in his position are often less inclined to do. He told the unvarnished truth, understanding completely what effect today’s announcement would have. East is going to be a breath of fresh air for shareholders in a company that has a reputation for a lack of communication.
We are already seeing the immediate effect. While it doesn’t seem to paint a pretty picture, we are only seeing the initial brush strokes that East has applied to a canvas that I expect will become a masterpiece of astute management of “reporting its problems earlier and more clearly than previously.”
Despite layoffs and cessation of it share buyback program making the current situation look somewhat bleak, the order pipeline remains substantial and sustainable. East’s actions, that put the company operations under more scrutiny than it has been accustomed to, should ultimately work out for the good of all concerned by strengthening and positioning the company for the future beyond 2015 and 2016.
