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Volvo: investors fear carmaker’s strategy lacks juice

Group’s cheap valuation will only suit the most patient investor

Electric vehicle buyers fret about range. Investors in Volvo Cars have similar worries about the staying power of the carmaker’s new strategy.

The company has promised to end production of internal combustion cars by 2030. Sales of battery-powered cars and SUVs are growing at double-digit rates. Yet its share price trails European competitors and EV specialists. Since it listed, its market value has dropped by over a third.

There are good reasons for this. The company, which is majority-owned by China’s Geely, may not meet its targets. Although EV sales have grown 27 per cent over two years, not all of that expansion is profitable. Polestar, Volvo’s upmarket EV brand, loses money. Volvo owns a 48 per cent share of Polestar. Its losses, plus those of other associates, weigh on group operating earnings. Polestar will not go into the black until 2025, according to analysts’ estimates on Visible Alpha.

Time and money are required from Volvo. In mid-November, a week after the carmaker’s third-quarter earnings, it announced it would extend its financing to Polestar by another $200mn, plus up to $1.3bn via external debt and equity raising. That sounds like an overhang on the shares. Meanwhile, Volvo’s free float is a mere 18 per cent.

There is little profit growth elsewhere either. By 2024, group operating profits, including joint-ventures and associates, will have walked sideways over three years. No wonder the company’s enterprise value is a mere 4 times operating earnings. It is one of the cheapest carmakers in Europe.

Shares trade at roughly SKr33. But put Volvo Cars on a market norm multiple of 5.5 times next year’s core operating earnings, tack on Polestar at one time 2024 revenues plus other associates, joint ventures and net cash and it could be worth more than SKr56 per share, thinks Bernstein.

As long as the market doubts Volvo’s execution the share price will only move downhill. The cheap valuation will only suit the most patient investor.

On an NFL Sunday, oddsmakers juggle athletic drama on the field and the financial stakes behind it

JERSEY CITY, N.J.—Miami Dolphins wide receiver Tyreek Hill recently marked a 78-yard touchdown with an unusual celebration. He and teammates imitated riding a roller coaster, sitting on the field with their arms waving overhead.

More than 200 miles away, sports-betting company FanDuel’s sports-trading desk was riding its own waves that Sunday afternoon. The traders on duty—self-professed sports buffs with a knack for math—were trying to predict how National Football League athletes and teams would perform that day.

Sports-trading desks are similar to financial-trading desks on Wall Street, which enable investors to buy and sell stocks and bonds. However, the sports desks create odds to influence and entice bets in a live market where hundreds of millions of dollars are exchanged on American athletic events.

Hill’s seconds-long run into the endzone meant a $68,000 hit to the sportsbook on customer bets on whether he would score the first touchdown of the game. Immediately, bettors’ money started rolling in on Hill to score more touchdowns and gain more yards.

The Dolphins ended up trouncing the Washington Commanders 45-15. FanDuel lost $1 million on the game.

“You have good days, bad days,” said Will Twinn, a lead FanDuel sports trader that day. “It’s really about getting the prices right and let the cards fall where they may.”

Sports betting has become big business for gambling companies, sports leagues and media outlets over the past five years. By the time your finger taps the glass of a smartphone screen to place a bet, a sportsbook trading desk powered by algorithms and raw data on past and current games has made its best guess of what is likely to play out on the field.

FanDuel’s algorithm simulates each play of a football game 10,000 times to try to predict the outcome, who might score a touchdown or how many yards a wide receiver might get.

While financial markets typically operate within set trading windows, sportsbooks add new markets—additional betting offerings—around the clock. If a trader needs to step away for a quick break, another steps in.

On the recent Sunday, FanDuel took in more than $200 million bets on NFL games. That figure is the total amount customers placed in bets that day, before winnings were paid out.

As one FanDuel trader rushed to shift the Dolphins’ odds after Hill’s touchdown, another monitored the New England Patriots’ matchup with the Los Angeles Chargers. Patriots running back Rhamondre Stevenson had to be helped off the field after an ankle injury.

The trader immediately started adjusting the odds, making it more likely that Stevenson’s backup would score. “That’s information we didn’t know 15 minutes ago,” Twinn said.

Sports-betting companies must strike a balance between protecting the business’s bottom line and setting prices—the possible winnings—appealing enough that customers will want to make a bet. The more accurately a company can predict what will happen, the more money they stand to make. It is a science and an art.

Just as financial trading desks pipe in securities prices from stock exchanges, sports desks rely on data feeds from the NFL.

FanDuel said it takes about 1.5 seconds to receive the data point—what happened on the field—and about 1 second for its model to process the data and push out new odds. That information travels faster than the game broadcasts and streams viewers watch at home.

The basic tenet of gambling—that the house always wins—lives on. While any given day might be a win or a loss for a sportsbook, overall, FanDuel said it makes about 11.5% in revenue from the total bets it accepts, after paying out winning bets.

FanDuel is owned by Flutter Entertainment, a Dublin-based gambling operator with popular brands in Europe and Australia. FanDuel was a daily fantasy-sports company when the Supreme Court issued a ruling in 2018 that ushered in a new era of gambling in the U.S. States beyond Nevada could legalize sports betting, and many state governments rushed in.

For Flutter and FanDuel, the challenge was establishing a trading desk from a talent pool in the U.S. with little experience in sports betting. Twinn, who started as a trader at Flutter’s Sportsbet in Australia, moved to the U.S. in 2019. He left the company shortly after the Dolphins-Commanders game.

On the recent Sunday, when several NFL games were scheduled to start at 1 p.m. ET, traders in Flutter’s offices in Dublin took the first shift. They monitored pregame news from around 2 a.m. ET and began adjusting the day’s odds. The Jersey City traders then took over, and by Sunday Night Football, the sportsbook was in the hands of traders in Melbourne, Australia.

Spencer Diaz, in his second NFL season as a FanDuel trader, sat in front of a half-dozen screens at his desk. One featured a high-speed video stream from the NFL of his assigned game, the Dolphins against the Commanders. Another showed a grid of odds from other sportsbooks for a view of the market trends. A third displayed FanDuel’s automated system, where traders can compare the FanDuel’s modeling with what is playing out on the field.

Diaz, a lifelong sports fan, picked working at FanDuel over going to law school. He said taking over responsibility for a game was, at first, “a bit nerve-wracking seeing all the money coming in.”

The Dolphins were favored to win at kickoff by 8.5 points, which shifted to 17 points as the game progressed. After Hill scored another touchdown, FanDuel decided the odds favored Miami to have a more decisive win, by a margin of about 22 points.

Ed Miller, who co-founded a company that automates sportsbook pricing for gambling companies, said the modern sportsbook is a far cry from Las Vegas-style sports betting in which human bookmakers made the calculations and you might find a white board with a game’s odds written on it.

FanDuel, which is going head-to-head with DraftKings for the No. 1 position in the sports-betting market, asserted its dominance with help of a now-ubiquitous product: the single-game parlay. A bettor can string together several bets on one game, including how specific players will perform.

The chances of winning—that each leg of the parlay will, in fact, happen in the game—lean heavily in favor of the house. The appeal of a big cashout, though, has maintained its popularity.

For example, when the Baltimore Ravens played the Jacksonville Jaguars on Dec. 17, FanDuel offered a seven-leg parlay on how five star players would perform in passing yards, receiving yards, rushing yards and touchdowns. A $10 wager would win $457. (The athletes’ performances didn’t pan out that way, and no customers won.)

A more straightforward bet that total points scored in the game would be more than 41.5 generated about $9 in winnings on a $10 bet.

U.S. courts could decide on potentially transformative cases involving Google and Meta

U.S. antitrust cases against tech giants Google and Meta Platforms META -1.22%decrease; red down pointing triangle are expected to come to a head in 2024, likely producing long-awaited rulings that could shape the legacies of top Biden administration regulators.

Silicon Valley and its critics have seen their patience tested on some of these cases. A U.S. antitrust case brought against Alphabet’s GOOG -0.25%decrease; red down pointing triangle Google unit in 2020 went to trial in 2023 and now heads to closing arguments in May.

“I think 2024 could be a big year for the enforcers,” said Rebecca Allensworth, a professor at Vanderbilt Law School. “But as the U.S. v. Google case illustrates, it’s been slow going.”

Here are significant cases courts are likely to render judgments on this year.

Google defends its search dominance

The Justice Department made headlines in 2023 by going to trial on claims that Google’s search engine is an unlawful monopoly. It could be late 2024 before there is a verdict.

When the nonjury trial ended in November after two months of testimony, U.S. District Judge Amit Mehta said he had “no idea” how he was going to rule on the question at the heart of the case: whether Google, which answers about 90% of all internet search queries worldwide, cemented its monopoly through unlawful agreements that make its search engine the default on Apple devices and other products.

Mehta has scheduled closing arguments for early May. If he rules against Google, he will oversee a separate proceeding to determine how to restore competition in the search marketplace. Under U.S. antitrust laws, the judge could force Google to sell off parts of its business. But that approach is unlikely in this case, where there isn’t a corporate merger being challenged, some legal experts have said.

Google has argued that its search engine dominates because it is a superior product that yields the most relevant search results. Its lawyers have happily pointed out that the top search query on Bing is the word “Google.”

DOJ takes on the ‘ad tech’ market

Google is also preparing for a trial early in 2024 over claims it is an illegal monopolist in the market for brokering ads on the internet.

The Justice Department and a group of state attorneys general brought that case in January 2023. It is being heard in the Eastern District of Virginia, known as a “rocket docket” because of its relatively quick timetable for bringing cases to trial.

“Have your running shoes on,” U.S. District Judge Leonie Brinkema in Alexandria, Va., told lawyers for both sides. She scheduled a pretrial conference for Jan. 18—six months earlier than the parties had suggested—and said she would then announce a trial date, which could be as early as March.

The Justice Department asked the court to unwind Google’s “anticompetitive acquisitions,” such as its 2008 purchase of ad-serving company DoubleClick, and has called for the divestiture of its ad exchange.

Google lost an early bid to dismiss the case in March 2023, when Brinkema said the Justice Department’s lawsuit was sufficiently detailed to proceed.

Google also lost a bid to disqualify the Justice Department’s antitrust chief, Jonathan Kanter, from leading the ad-tech case based on his prior work in private practice for Google critics, including Yelp.

Kanter has been one of Google’s main legal foes for nearly 15 years, a leader of a movement that sees big technology companies including Google, Amazon and Meta as monopolists in the tradition of the 19th-century railroad and oil companies that inspired the original antitrust laws.

The FTC and Meta square off

If the Federal Trade Commission gets its way, this could be the year of judgment for a major antitrust case against Meta Platforms. The FTC brought the case in December 2020, during the final weeks of the Trump administration.

The FTC, which shares responsibility for enforcing antitrust laws with the Justice Department, alleges Meta, formerly known as Facebook, unlawfully sought to suppress competition by buying up potential rivals such as the messaging platform WhatsApp and image-sharing app Instagram. Meta has said those were procompetitive deals that benefited consumers.

The case has moved slowly. In June 2021, U.S. District Judge James Boasberg dismissed the complaint originally filed under the Trump administration, saying the FTC hadn’t sufficiently backed up its allegation that Meta has monopoly power. After the agency beefed up and refiled the case, the judge said the agency could begin deposing witnesses.

But when the FTC in December asked Boasberg to push the litigation forward, Meta’s lawyers countered that the case is “nowhere near trial.”

“After delaying nearly a decade to challenge historical acquisitions that the agency reviewed in 2012 and 2014, the FTC has no basis to claim that this case is now urgent,” Meta’s lawyers said.

While the case predates FTC Chair Lina Khan’s tenure, it will help define her legacy. Both before and since she took the post in 2021, Khan has argued in favor of blocking more deals, aggressively attacking monopolistic practices and potentially breaking up some of America’s largest companies, particularly in Big Tech.

Meta has said Khan is biased, and sought to block her involvement in a different FTC case relating to Meta’s acquisition of the virtual-reality firm Within Unlimited. In that case, a federal judge denied the FTC’s request for an injunction halting the acquisition.

That decision, while a setback for the FTC, included some legal analysis that could help the agency bring similar cases involving nascent markets.

Khan enters 2024 with a mixed record in court fights. In July, a federal judge ruled against the FTC and allowed Microsoft to go ahead with its $75 billion purchase of videogaming company Activision Blizzard.

But in December, a federal appeals court agreed with the FTC that Illumina’s purchase of cancer-test developer Grail was anticompetitive, prompting the San Diego-based company to pursue what its CEO called an “expeditious divestiture” of Grail by the middle of 2024. And on the last business day of 2023, a judge blocked healthcare data provider IQVIA from buying the owner of pharmaceutical ad-technology company DeepIntent, agreeing with the FTC that there was “a reasonable probability that the proposed acquisition will substantially impair competition in the relevant market.”

Those rulings don’t mean that Khan and Kanter will succeed in persuading more courts to buy in this year to their broader take on antitrust law. “It’s going to be a marathon, not a sprint,” Vanderbilt’s Allensworth said.

The German automaker behind iconic models such as the Beetle is trying to find similar success in the EV market

BERLIN—Almost a decade ago, Volkswagen VWAPY -0.49%decrease; red down pointing triangle set out on an expensive quest to dominate the new world of software-defined cars and build the electric “people’s car.” It is still trying.

The German automaker has invested billions of euros, retooled entire plants and created new software and battery companies to assist in making the transition. However, VW has yet to produce an EV that has matched the success of its historic gas-powered models such as the Beetle and the Golf in its core markets.

Sales of its electric flagship, the ID. series, have disappointed. So VW decided against scrapping the 50-year-old Golf, and it is developing an all-electric version that the company said could be launched by the end of the decade.

Building and selling the electric car for “everyman” remains a core mission of Volkswagen, which translates as “people’s car.” In an attempt to reinvigorate VW’s mass appeal, the company is in the midst of a major restructuring so that it can produce profitable, desirable electric vehicles.

“VW also wants to get very young people excited about the brand,” said Oliver Blume, who has the dual role as chief executive of Porsche and CEO of the entire VW company, which includes VW, Porsche, Audi, Bentley and Lamborghini, in emailed comments.

Other automakers, such as General Motors and Ford Motor, have also been paring their electric ambitions, with some scaling back their production plans.

In VW’s case, Blume has launched a plan to slash 10 billion euros in costs, equivalent to around $11 billion, halt plans to build a new ultramodern EV factory in Wolfsburg and postpone plans for further battery plants in Europe.

The cuts are aimed at lowering the cost of making vehicles, which would boost earnings and give VW more flexibility to lower prices for entry-level EV buyers. Earlier this year the company unveiled the ID. 2all, a small hatchback that the company says will sell for less than €25,000 and is one of 10 new EVs that VW is slated to launch by 2026.

“As a young man I was also an enthusiastic Beetle and Polo driver. And there are very many customers who have such positive experiences and develop a close connection to the Volkswagen brand,” Blume said.

Blume said the company was working to develop a more affordable EV that could sell for €20,000 in the second half of the decade, a move to counter Chinese and other competitors entering the European market with cheap EVs.

VW executives have warned staff of a tough year ahead.

“The situation is very critical,” Thomas Schäfer, CEO of VW’s namesake brand, told labor representatives at a meeting in Wolfsburg at the end of November, according to a transcript seen by The Wall Street Journal. “With many of our current structures, processes and high costs, we are no longer competitive.”

VW said on Dec. 19 that it had reached an agreement with union representatives to slash labor costs in administration by 20% through early retirement, expanding buyouts and not filling positions made vacant by retirements.

The impact of these measures could provide “a positive contribution to earnings totaling 10 billion euros,” VW said in a statement, with the aim of doubling the profit margin of the VW brand to 6.5% by 2026.

In addition to reducing the workforce, VW has also scrapped plans for new buildings and plans to speed up the time it takes to get products to market, by offering fewer feature options and slashing new model development time to 36 months from 50 months now.

VW remains a combustion-engine behemoth: The company said it sold 8.3 million vehicles worldwide in the first 11 months of the year, a gain of about 12% from a year ago.

VW has also taken strides as it shifts its business away from conventional cars. With all brands and models combined, the company has a 20% share of new EV sales in Europe this year, according to data from ev-volumes.com, ahead of Stellantis and Tesla—an edge VW hopes it can soon extend to the rest of the world.

EVs from the company’s VW brand are losing market share in Europe, according to a report on sales through October by ev-volumes analyst José Pontes. He said the VW brand now has about 8.2% of the market, slightly behind BMW and trailing Tesla, which has 12% market share.

Tesla has the bestselling all-electric models in Europe but, after a rocky start, VW’s ID. 3 and ID. 4 all-electric cars, the Audi Q4 e-tron and Skoda’s Enyaq iV—also a VW brand—are gaining traction. Amid its push to get those models to market, VW has dealt with high costs, low productivity, launch delays caused by substandard software and a shaky global economy.

Blume is overhauling the software unit, Cariad, which has struggled to supply software on time to meet the deadlines for product launches, forcing Audi and Porsche to delay model launches.

Earlier this year, Blume reshuffled the unit’s management and launched a restructuring program to accelerate software development. The unit will focus development on near-term launches of group vehicles and move more visionary and complicated software projects—such as autonomous vehicle software—to the back burner.

In China, a new generation of homegrown low-cost, high-tech electric models have overtaken the German company’s EVs in the country, which accounted for about 34% of its sales in the first 11 months of the year. So far this year, VW sales barely grew in China, its weakest showing in major markets worldwide. The new Chinese competition is also targeting Germany and Europe.

Although VW produces vehicles in China, its EVs tend to be more expensive than its Chinese competition. Analysts said VW failed to offer midrange EVs that are in high demand in China and misread Chinese consumers’ preferences, which prize high-tech gadgets in their cars.

To claw back lost market share, VW has invested in the Chinese startup XPeng to acquire technology for new vehicles that will come to market in the next few years. VW is also building up huge R&D facilities with Chinese software engineers in the country.

“A car company can’t be turned around in one year, but with our medium and long-term measures we are on the right course,” Blume said.

Japan Investment Corporation’s $6.4bn offer for JSR comes as governments seek to protect semiconductor technology

A takeover bid from Germany’s Merck prompted JSR, a Japanese chip materials maker, to seek a buyout from a state-backed fund, in a deal that has sparked investor scrutiny on rising government intervention in the country’s semiconductor industry.

Four people with direct knowledge of the talks said it was Merck’s bid for JSR, which was not disclosed to shareholders, that led to the $6.4bn tender offer in June from the Japan Investment Corporation, a fund overseen by the Ministry of Economy, Trade and Industry.

JSR commands a third of the global market share of photoresists, specialist chemicals used to print circuit designs on chip wafers. Its clients include the world’s biggest chipmakers Samsung, TSMC and Intel.

Merck, a healthcare to life sciences group, submitted a takeover offer for JSR in the autumn of 2022, according to the four people familiar with the situation.

The people added that Merck’s formal offer — which was considered and rejected by JSR’s management — was followed by similar approaches from at least two private equity houses. One of the buyout funds presented ideas including carving out JSR’s non-core businesses and taking the company private, according to two of the people. JIC declined to comment on the offers.

Immediately afterwards in November 2022, JSR approached JIC, leading to the $6.4bn take-private deal in June. The offer has shocked JSR investors and clients as a bold move, even at a time when countries are battling for technological supremacy and control over the global semiconductor supply chain.

However, the deal has yet to move ahead. The fund has since pushed back the planned launch of its tender offer from late December to at least late February, blaming the delay on a Chinese antitrust review.

Shares in JSR have fallen nearly 7 per cent since hitting a 2023 high in late June over concerns about whether JIC’s offer would get clearance from global antitrust authorities, and the company’s weak financial performance.

Three JSR shareholders questioned whether there had been a fair market check before the company agreed to a deal with JIC. The deal leaves a “big question mark” over when the government might next intervene in the private sector to ensure economic security, said one investor.

Senior trade ministry officials have said that the government would not intervene in the management of a listed company and would have been open to considering any rival offer to JIC’s bid.

JSR’s chief executive Eric Johnson has consistently stressed that the company had initiated discussions with JIC, saying its backing would help to accelerate both the restructuring of the company as well as the industry. 

“Going private with JICC will provide JSR with more flexibility and agility in the management decision making that is critical to the medium and long-term growth strategies required in the industries in which we operate,” the company said in a statement to the Financial Times.

In a previous interview, Johnson said that the company had not received any offers from private equity firms. “There were no discussions with anybody else,” he said. JSR declined to comment when asked whether there was a takeover offer from Merck.

However, people with knowledge of the deal said JSR wanted JIC to set a sufficiently high premium — offering ¥4,350 per share or a 35 per cent premium to the previous day’s closing price — to scare off rival bids and satisfy activist fund ValueAct, a partner of which sits on JSR’s board. 

Merck has been pushing to bulk up its performance materials unit as chipmakers and their suppliers seek to profit from an explosion of demand for data centre chips that power generative AI services.

The family-backed company bought London-listed speciality chemicals group AZ Electronic Materials for £1.6bn, including debt, in 2014. In October 2019, Merck also completed a €5.8bn acquisition of US-based Versum Materials, which makes critical components used in semiconductors.

Merck declined to comment.

Investors cheer sharp shift in fortunes at Rolls-Royce

New CEO Tufan Erginbilgic has stressed turnaround has been company-led but some see environment helping

Investors in Rolls-Royce, who in recent years have had little reason to celebrate, are in a cheery mood at the start of the new year.

Rising 224 per cent in 2023 to 299.7p, the FTSE 100 engineer’s shares have recorded their best annual performance since the company was privatised in 1987, heading the list of top gainers in the Stoxx 600 of Europe’s largest listed companies in 2023.

The sharp shift in the company’s fortunes on the stock market has coincided with the arrival of chief executive Tufan Erginbilgic, the oil industry veteran who took the controls at Rolls-Royce in January 2023 with a mandate to improve performance and drive down costs. 

He has been brutally — and publicly — frank on Rolls-Royce’s shortcomings, shaking up senior management, announcing job cuts and setting ambitious financial targets. 

Many investors and analysts have bought into the turnaround story, including longtime bear David Perry of JPMorgan, who in December issued an “overweight” rating on the stock for the first time since October 2014.

“I have never seen a CEO have such a positive impact in such a short period of time,” said Perry.

“Recovering market conditions have helped, but much of this recovery was expected 12 months ago. So we think most of the improvement in Rolls-Royce’s 2023 performance and its . . . upgraded financial targets is down to initiatives implemented by Erginbilgic and his team,” he added.

Despite the enthusiasm among many towards the new CEO, others are keen to stress that while he can take credit for bringing in greater cost discipline, he has been fortunate with timing — notably the dramatic rebound in global travel as well as the rise in defence spending by governments.

The company makes most of its money from long-term service agreements on its passenger jet engines, and the recovery in international air travel, notably in the Asia-Pacific region, has brought more cash flowing in. 

“He has a following wind from increased flying, strong defence [spending] and the strong US dollar; and little in the way of new product spend,” said one former industry executive. It would be hard to tell what impact his actions were already having, they added. 

Rolls-Royce is no newcomer to restructurings. The 117-year-old company’s recent history is marked by successive turnaround plans launched by different chief executives.

The group is best known for building and maintaining large engines for passenger jets but it also makes turbines for fighter aeroplanes and reactors that power nuclear submarines. It also produces diesel and gas engines for ships and power generation. 

Despite its longstanding position as Britain’s pre-eminent engineer, Rolls-Royce’s operating margins have historically underperformed those of larger peers such as America’s General Electric. More recently, its pursuit of trying to win market share from rival engine makers saw it sometimes sacrifice profitability and price. 

It was also particularly badly hit by the pandemic due to its focus on building engines for widebody aircraft that fly long-haul, a segment of the market that suffered from the decline in international flying. 

When Erginbilgic took over from his predecessor Warren East, he joined with a reputation as a formidable operator. Key priorities were to reduce the losses when the company makes and sells an engine, as well as to ensure that costs taken out during the restructuring did not creep back in once volumes returned as the industry recovered. 

He has acted quickly to put his stamp on the organisation; almost half of Rolls-Royce’s senior executives, including former chief financial officer Panos Kakoullis, have changed positions or left as part of the restructuring and his move to centralise core functions such as human resources and purchasing. 

Erginbilgic has been eager to stress a company-led turnaround rather than on that depends on the market.

“It is our actions that are driving the performance. It is not the environment,” he said at the company’s capital markets day in November where he announced new midterm targets for operating profits of up to £2.8bn by about 2027, four times the amount it reported in 2022. 

The targets, “actually mean a step change in performance”, Erginbilgic said, noting the company had already upgraded its 2023 guidance at the time of its half-year results in August.

“Those numbers in terms of cash and operating profit will be our best on record, while engine flying hours are still at around 86 per cent,” he said. 

The group is aiming to increase operating margins to 13-15 per cent as part of the midterm plan. In its core civil aerospace business, it expects to achieve operating margins of 15-17 per cent, up from 2.5 per cent in 2022, a move that would bring it closer to rivals such as GE.

Nick Cunningham, analyst at Agency Partners, said the “underlying volume increase in engine flight hours and the underlying revenue increase from long-term service agreements is not a surprise”, noting that “China reopened at the beginning of [2023]”.

He nevertheless credits Erginbilgic with laying the foundations for better future performance. “A lot of what he is doing in terms of trying to improve the contract structure and the financial discipline — managing working capital, not writing new, bad contracts — those things pay off over time,” said Cunningham.

Graeme Forster, portfolio manager at Orbis, which bought into Rolls-Royce shares about seven years ago, argues that some credit is also due to Rolls-Royce’s “no-nonsense” chair, Anita Frew. Frew, who appointed Erginbilgic, has also overhauled the board since she herself started in October 2021.

Warren East, Erginbilgic’s predecessor, who ensured the company survived Covid and launched his own restructuring programme, including 9,000 job losses to save £1.3bn in costs, also deserves credit, according to Forster. 

Company insiders say that in the short term at least, the outlook is good. With the latest commitment by Turkish Airlines to purchase more than 200 Airbus aircraft, including A350s which are powered by Rolls-Royce engines, 2023 will be the best year for Rolls-Royce in terms of new orders for 15 years.

A key mark of success will be when Rolls-Royce is upgraded to investment grade by all of the rating agencies. S&P Global upgraded it to BB+ in December. Some analysts believe a further shift higher could happen relatively soon, which could pave the way for the company to start paying a dividend again. 

The engineer’s balance sheet will also benefit from not having to spend heavily on a new engine development in the medium-term. But one big strategic question still looms over Rolls-Royce: how does it re-enter the lucrative market for the engines powering narrow-body commercial airliners.

The company left that segment more than a decade ago when it pulled out of a joint venture with Pratt & Whitney of the US.

Erginbilgic has made much of the fact that the company could use new engine technologies from its UltraFan programme to work with another supplier. The next generation UltraFan demonstrator engine aims to be 25 per cent more efficient than the group’s first Trent engines.

Whether he stays the course for this to happen — Erginbilgic is 64 years old — or whether it will be a challenge for a successor, remains to be seen.

For now, the focus will be on ensuring Rolls-Royce delivers on those new targets, including improving the earnings margins on its long-term service agreements with airline customers.

To get there, the company will not only need to charge higher prices and reduce its own costs, but also improve the durability or “time on wing” of its aircraft engines so they fly for longer before coming in for maintenance.

Rolls-Royce’s R&D engineers are now “focused on improving time on wing”, said JPMorgan’s Perry. “They will need to deliver the promised improvements . . . if Rolls-Royce is to achieve its targets.”

Rolls-Royce topped European stocks in 2023

UK engine maker’s performance on Stoxx 600 comfortably beats Danish pharma giant Novo Nordisk

There was much fanfare in 2023 about Denmark’s Novo Nordisk, which became Europe’s most valuable company. But in the race to be crowned the region’s best-performing mainstream stock, there was no contest: Britain’s Rolls-Royce achieved that accolade.

The engine maker soared around 220 per cent in 2023, eclipsing the drugmaker’s 49 per cent rise, to become the best performing stock of the Stoxx Europe 600 index, the continent-wide benchmark.

A steady stream of well-received announcements propelled the engineering group higher, beginning in February when it launched a strategic review. Rolls-Royce, headed by new chief executive Tufan Erginbilgiç, said it saw “significant scope for us to deliver materially higher profit, cash flows and returns” following a post-pandemic rebound in the aviation industry.

The group rallied again in July, buoyed by a boost to its full-year guidance, and leapt the following month after posting a fivefold increase in underlying operating profit for the half year.

The standout division was civil aerospace, reflecting “higher after-market profitability and increased large spare engine sales”, it said at the time.

Dan Coatsworth, AJ Bell stock market analyst, pointed to “ambitious targets” that triggered another rally in November. The catalyst was a goal to quadruple profits in the next four years and sell its electric aircraft division.

But while Rolls-Royce may have trounced Novo Nordisk in annual share price gains, the pharma giant — riding high on its drugs for obesity — retains bragging rights when it comes to size. Rolls-Royce’s market cap of around $32bn is dwarfed by $356bn for the Bagsvaerd-based company, according to LSEG data.

London’s unfancied FTSE 100 index, which rose just 3.8 per cent this year against a 24 per cent jump in Wall Street’s S&P 500, was also home to high-street mainstay Marks and Spencer, which took the third top spot on the Stoxx Europe 600 index.

The retailer finished the year up around 120 per cent following a return to the blue-chip benchmark in 2023. This stock benefited from an unexpected rise in the group’s full-year guidance in August and management’s November announcement that it would be reinstating a dividend.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said M&S’s “bread-and-butter customers” had “higher disposable incomes, which is partly why the chain is showing such resilience”.