Should I buy one of the cheapest shares on the FTSE 100 index?

This Fool explores one of the cheapest stocks on the FTSE 100 index by share price and decides if he would buy or avoid the shares.

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Melrose Industries (LSE:MRO) is currently one of the cheapest shares on the FTSE 100 index based on share price. Should I add the shares to my holdings or avoid them? Let’s take a closer look.

Manufacturing and industrial business

Melrose owns manufacturing and industrial businesses across a number of geographical regions and sectors. The main ones are aerospace, automotive, powder metallurgy, and other industrial. It also acquires under-performing businesses with a view to improving them.

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So what’s happening with the Melrose share price currently? Well, as I write, the shares are trading for 115p. At this time last year, the shares were trading for 179p, which is a 35% decline over a 12-month period. Melrose shares are up 5% from 109p on 8 March, which was its stock market correction low. The stock market correction was caused by macroeconomic headwinds and geopolitical issues and saw many FTSE 100 shares drop.

For and against investing

FOR: Prior to the pandemic, Melrose had a good record of performance but this took a hit due to a slow down in many of its aforementioned sectors. While there are credible threats to performance returning to pre-pandemic levels, final results for the year ending 31 December 2021 made for positive reading, in my opinion. Reported at the beginning of March, Melrose confirmed that revenue, profit, and earnings per share all increased compared to 2020 levels. Net debt and overall leverage significantly reduced, which is a major plus for me as a potential investor.

AGAINST: Macroeconomic headwinds coupled with geopolitical tensions due to the tragic events in Ukraine remain a real risk that could hinder Melrose’s performance. Soaring inflation and the rising cost of raw materials could impact the bottom line and profit margins. This could affect shareholder returns. The global supply chain crisis, such as the shortage of semiconductors for new cars that sits under the automotive sector of Melrose’s operations, is causing a slowdown of sales and growth too.

FOR: Melrose shares look cheap at current levels on a price-to-earnings ratio of just four. The FTSE 100 average is 15. Furthermore, the shares could boost my passive income stream. Melrose shares offer a current dividend yield of 1.5%. It is worth noting that dividends are not guaranteed and can be cancelled at any time.

AGAINST: Melrose’s business model involves acquiring under-performing businesses and turning around their fortunes. I am always wary of businesses that undertake lots of acquisitions. There is always the risk that these acquisitions could be costly financially and otherwise. For example, a business may be overpriced, or it may not integrate into the existing group of companies.

A FTSE 100 stock I’d buy

Overall, I think Melrose shares have come under pressure in recent times due to macroeconomic issues out of its control.

These issues are short to medium term issues, in my opinion. I think Melrose is a good business with a decent track record and is priced cheap. I would be willing to add a small number of the shares to my holdings. In the short term, I would expect some pain, but in the longer term, there are positive signs and I would not be surprised to see regular and consistent returns from the shares.

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Jabran Khan has no position in any of the shares mentioned. The Motley Fool UK has recommended Melrose. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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