Invezz.com - Rolls-Royce (LON:RR) share price has pulled back in the past few days after the company published its financial results. After peaking at 592p on November 6, the stock has pulled back to 553p, giving it a market cap of over $61 billion.
Rolls-Royce share price dropped after earnings
Rolls-Royce Holdings, the biggest industrial giant in the UK, published strong financial results as demand remains steady. These numbers also showed that Tufan Erginbilgic, the Chief Executive Officer (CEO), strategy was working.
The company’s trading statement said its results would align with the previous guidance. It expects its operating profit to be between £2.1 billion and £2.3 billion and its free cash flow to be between £2.1 billion and £2.2 billion.
The civil aviation business, its core segment, drives its performance. According to its statement, flying hours rose by 18% YoY to 102% of pre-pandemic levels. It hopes that its full-year house will be between 100% and 110% of the 2019 hours.
These hours are highly important for Rolls-Royce, a company that makes most of its money in long-term service contracts. Erginbilgic is also hoping that its engine margins will continue growing in the coming months.
The rebound of the civil aviation industry has pushed more airlines to make large orders. For example, Cathay Pacific made an order of 60 Trent (NS:TREN) 7000 engines, while EL AL Airlines ordered several Trent 1000 engines. These orders may continue as the backlog by manufacturers like Airbus and Boeing (NYSE:BA) jump.
The other divisions of Rolls-Royce Holdings will also continue doing well. Its defense business is thriving, helped by the rising need for more defense spending in the US and other countries. This spending will likely continue rising as Trump threatens allies to boost their spending.
Rolls-Royce Holdings is also seeing strong growth in its power business, helped by demand from companies running data centers. It also has substantial backlogs from governments and other companies.
Rolls-Royce share price retreat mirrors that of GE Aviation whose stock moved into a correction, falling by over 12% from its highest level this year.
Read more: Here’s why the Rolls-Royce share price could surge to 600p soon
RR valuation concerns
A key concern among Rolls-Royce shareholders is that the company has been its valuation since the stock has jumped by over 1,500% from its lowest level in 2023.
This surge has brought its market cap to over $61 billion, a substantial figure for a company that is in recovery mode.
Data by SeekingAlpha shows that Rolls-Royce Holdings has a forward price-to-earnings ratio of 37, much higher than the manufacturing sector median of 24.5. The ratio is also higher than the S&P 500 sector median of 21.
This valuation is mostly because of the key industry growth, its turnaround measures, and the fact that it has not had major issues in the past few years.
As part of its turnaround, Rolls-Royce has slashed jobs, and recently, it sold its Naval Propulsors & Handling business to Fairbanks Morse Defense. It has also sold its Direct Air Capture assets and its lower-power-range engines. Also, it closed its electrical advanced air mobility business.
All these measures have also helped the company receive credit rating upgrades from all the three credit rating agencies.
Rolls-Royce share price analysis
RR chart by TradingView
The weekly chart shows that the RR stock price has been in a strong bull run in the past few years. As a result, it has remained above the 50-week and 25-week Exponential Moving Averages (EMA). It has also remained about 30% above the 50 moving average.
However, there are signs that the stock is losing momentum. It has formed a shooting star pattern, which is made up of a small body and a long upper shadow.
The stock has also formed a bearish divergence pattern as the Relative Strength Index (RSI) and the MACD indicators have pointed downwards. It has also formed a rising wedge pattern.
Therefore, the stock will likely have a bearish breakout as sellers target the key support at 500p or the 50 EMA at 426p.