There haven’t been many company share prices that have come through the last three months unscathed. The threat of a global recession resulting from Covid-19 has made markets jumpy and volatile. That does create opportunities for long-term investors.
One of the hardest-hit companies
Shares in Melrose Industries (LSE: MRO) have fallen over 66% in just this year so far. This follows a strong performance in 2019 and into the beginning of this year. The economic slowdown has changed everything.
The industrial turnaround specialist, which acquired listed company GKN for £8bn in a hostile takeover, has been hit hard for a number of reasons.
It faces challenges because GKN is a major aerospace supplier, an industry that has been hit hard by the global pandemic.
The deal has also massively increased Melrose’s debt to £3.3bn. High debts are now something investors are wary of at a time when revenues will be lower. This largely explains the share price fall, along with the fact the group has major aerospace customers.
Now though, with the price-to-earnings below six and the shares among the worst performers in the FTSE 100 I think the shares are too cheap to ignore. The dividend has been cut and other cost savings are being found.
The business is well run. In early March the industrials group announced full-year revenues rose 34% to £ 11.6bn. Operating profits rose 35.5% to £ 1.1bn. So, assuming COVID-19 doesn’t close down the business for too long, it should come out the other end of this stronger. Especially if it means competitors go out of business, which is highly likely.
Another major FTSE 100 faller
The Rolls-Royce (LSE: RR) share price has fallen by 55%, making it also one of the hardest-hit companies in the FTSE 100. Unlike Melrose, it wasn’t performing spectacularly well before the coronavirus came along, but there is an opportunity for a turnaround. Investing in its shares suits only a patient investor.
Another similarity to Melrose comes from the fact Rolls-Royce is a major supplier to the global aviation industry, which now has most planes grounded, staff furloughed, and little to no need for maintenance on engines.
It’s a challenging time for the company but with the shares at a level not seen for a decade, they might be too cheap to ignore.
Rolls-Royce will be helped by cash reserves of £6.7bn. This money should see it through the crisis, or at least until the back end of this year. Like other companies, it has taken measures to cut costs and draw down on credit facilities.
Given how cheap the shares are, I think a bounce back when markets move higher – and they will at some point – is definitely on the cards.
Both shares have potential and look undervalued. The recent market sell-off has given investors, prepared to invest for the long-term, the chance to buy two great companies at knock-down prices.
