October has been quite a rough month for the Melrose Industries (LSE:MRO) share price so far. The engineering giant has watched its stock decline by nearly 10% over the last week or so, pushing its 12-month performance to around 11%. So, what’s causing this downward pressure? And is this actually an opportunity for me to increase my investment position?
Looking at the positives
I’ve looked at this business before. But as a quick reminder, Melrose is essentially a holdings company that acquires struggling engineering firms. It then installs new management teams and attempts to turn these ventures around so that they can later be sold at a much higher price.
Historically, its ability to identify lucrative opportunities within the sector has been quite impressive. Unfortunately, the pandemic decimated much of the once-thriving aerospace industry, which the group has quite a substantial stake in. In fact, this is what caused the Melrose share price to collapse last year.
Since then, things have improved. Looking at the recently published trading update, aerospace markets appear to be recovering nicely. Revenue between July and September this year increased by 16%. And management now expects this growth rate to accelerate further throughout the rest of 2021. So why is the stock still falling today?
The catalyst behind the falling Melrose share price
Unfortunately, its Automotive and Powder Metallurgy divisions haven’t experienced the same luck. The underlying demand for both of these sectors remains high. However, due to the ongoing semiconductor shortages worldwide and other supply chain disruptions, Melrose is simply unable to deliver orders in a timely fashion.
Consequently, the level of order cancellations has skyrocketed from the typical 1% each month to between 20% and 25%! To make matters worse, there doesn’t appear to be any clear timeline as to when these problems will be resolved as they are largely outside of the company’s control.
But the problems don’t end there. With inflation on the rise, the price of raw materials, especially metals, continues to climb higher. While the business can try to pass on these costs to customers, its pricing power remains limited given the competitive nature of the industries it operates in.
With all that in mind, I’m not surprised to see the Melrose share price take a hit.
The bottom line
These problems are undoubtedly frustrating. However, they are ultimately a short-term nuisance rather than a long-term disaster. Melrose has been actively restructuring the firms in its portfolio to reduce expenses that should help mitigate the impact of rising material prices. In the meantime, the supply chain disruptions will eventually sort themselves out as new businesses emerge to try and profit from the situation by resolving it.
Therefore, personally, I think the recent weakness in the Melrose share price presents an excellent opportunity for me to increase my existing position.
