Job cuts can be good for share prices as it means that management is cutting costs and streamlining the business. But Rolls Royce shareholders can’t bank their profits just yet sd their shares slide following the news of a further 2,500 job cuts. Jet engine maker Rolls Royce has been in the headlines again this week as the company revealed plans to cut a further 2,500 jobs from its global workforce, representing approximately 6.0% of its headcount.
The proposals come as part of an ongoing rationalisation of the business under the new CEO, Tufan Erginbilgic, who took over from former ARM Holdings boss Warren East.
Mr Erginbilgic famously described Rolls Royce as “a burning platform indeed of transformation” and since he took on the CEO role he has enthusiastically set about creating what he calls:
“A Rolls-Royce that is fit for the future. That means a more streamlined and efficient organization that will deliver for our customers, partners and shareholders,”
Investors have liked what they see at Rolls Royce believing that the new CEO can turn the business around.
Over the last 52 weeks, the Rolls Royce share price has rallied by more than +170.0% making it the best performer in the FTSE 350 Aerospace and Defence sector in 2023 to date.
However, in the last month, the stock has lost momentum, with the shares slipping by almost -9.0%. Just over a quarter of those losses have come this week.
Job losses are never nice, however, they are sometimes necessary as businesses try to cut costs and increase profitability. Rolls Royce employs 42,000 people worldwide half of whom work in the UK.
The company cut thousands of jobs during 2020 as demand for air travel fell under Covid 19. However, Mr Erginbilgic believes that the issues run far deeper than that
Performance and outlook for Rolls Royce
The rationalisation seems to be working, with the company reporting a five-fold jump in operating profits, for the first half of 2023, vs the same period a year before.
The servicing side of the business, which helps to maintain jet engines deployed by commercial airlines and other customers, saw margin growth of more than 12.0%, the highest growth rate in 10 years.
However, supply chain issues and inflation saw the company run up a £111.0 million loss for the first half of 2023.
Rolls Royce will hold a capital markets day on 28 November, at which it will set out the progress it’s made so far and its new medium-term financial targets for the market.
The shares which are priced at around 205p, are rated as a hold by city analysts, who have a 152.20p price target on the stock. For now, then it looks as though the stock price has run ahead of itself.