I noticed that FTSE 100 incumbent Melrose Industries (LSE: MRO) has been on an excellent run in recent months. Is it too late to buy some shares for my holdings? Let’s take a look at what’s been happening as well as some pros and cons of buying the shares.
Beating the FTSE 100 index easily
Melrose is a global aerospace business based in the UK. It has a track record of acquiring businesses that it can then improve as well as enhance its own offering.
As I write, Melrose shares are trading for 515p. At this time last year, they were trading for 289p, which is a 78% increase over a 12-month period. For context, the FTSE 100 index is down 2% in the same time period so to say Melrose shares have outperformed the market would be something of an understatement, in my opinion.
Positive results and change in tack
I believe Melrose’s excellent performance and a bullish aerospace market have contributed to its remarkable share price growth.
To start with, Melrose announced that last year’s profit levels jumped nearly 100% from £194m in the year prior, up to £394m. In my opinion, rising demand from the civil aviation sector after the pandemic helped here. In fact, another FTSE 100 stock that benefitted in the same sector is Rolls-Royce.
More recently, Melrose’s four-month update released in May was also promising. Revenue rose by 19% compared to the same period last year and significant growth in profit and margins were also revealed.
From a business perspective, Melrose is now a pure play aerospace business, whereas previously it also operated in the manufacturing sector. This change in tack seems to have paid off from a performance and sentiment perspective, in my opinion. Finally, the business is expecting record revenue for this year and substantial further growth in the years ahead.
From an investment perspective, all of this sounds great for Melrose. I can also see the shares would boost my passive income. A dividend yield of 1.5% is lower than the FTSE 100 average, but this could rise if performance were to grow as the company expects. However, I do understand that dividends are never guaranteed.
Risks and my verdict
From a bearish perspective, Melrose shares look expensive to me right now on a price-to-earnings ratio of 33. If it were to downgrade or not meet its forecasts, the shares could fall.
In addition to this, Melrose shares could be surging due to the heightened demand from the post-pandemic hangover. Could this slow down soon? This is something I’ll keep an eye on in the coming updates from the business.
Overall, I believe Melrose shares have been on a remarkable run in recent months but I’m not going to add the shares to my holdings, not yet at least. The current high valuation as well as the position of the civil aviation market and its demand levels helped me make my decision. I will keep a keen eye on the business and its movements much more closely than I have been but there are better FTSE 100 stocks out there for me and my holdings.
