Investors are constantly looking for the best shares to buy. And while there are a lot of seemingly attractive opportunities out there, not all of them end up delivering on expectations. Yet, one that appears to show particularly strong promise right now is Melrose Industries (LSE:MRO).
Until recently, the company focused on acquiring struggling industrial businesses, improving them, and then selling them for a profit. But since 2023, the firm’s transitioned into an aerospace pure-play enterprise, serving some of the biggest names in the industry, including Rolls-Royce, BAE Systems, and Airbus among others.
However, with the financial statements riddled with unusual expenses, as management completes the transition, Melrose doesn’t appear to offer much value. At least, not until digging deeper.
A lucrative turnaround opportunity?
Melrose is a bit of a complicated operation. But in short, it designs and manufactures aircraft and engine components for the civil and defence aerospace industries.
As part of its restructuring, management’s been streamlining operations to better position the company as well as boost profitability. And looking at the underlying figures, the results so far have been pretty remarkable. Underlying operating margins have expanded from 5% in 2022 to 15.6% at the end of 2024. And this appears to be just the tip of the iceberg.
In its latest results, Melrose outlined its 2029 objectives. And among them included the goal of increasing revenue from £3.5bn today to £5bn, boosting underlying profits from £540m to £1.2bn, delivering an operating margin of at least 24%, as well as reaching £600m in free cash flow generation.
The analysts at Investec took this information and baked it into their discounted cash flow model. And providing Melrose delivers on its promises, the model returned a 12-month price target of 1,000p.
That’s essentially double the current 520p price tag this stock currently carries. What’s more, the projection was an increase to Investec’s previous 735p forecast. Obviously, these analysts are bullish on the business. And with defence spending across Europe on the rise along with more passengers hopping on planes to go on holiday, Melrose certainly appears to have a lot of tailwinds to capitalise on.
What could go wrong?
Not everyone’s convinced that Melrose is a bargain. In fact, the analyst team at UBS seems to have a polar opposite view of Investec, with a price target of just 400p. In other words, it expects Melrose shares to fall. And digging into their thesis, there’s some logic to their argument.
Melrose’s 2029 targets assume that its customers, like Airbus and Boeing, are able to maintain their build rates of new aircraft and make progress in clearing an enormous backlog. They’re also dependent on the total number of aircraft flying hours continuing to trend upward. After all, the more planes fly, the sooner they need to be serviced and have their parts replaced.
Neither of these factors is in Melrose’s control. And should activity within the civil and defence aerospace markets unexpectedly cool, investors could be left disappointed.
Personally, I’m cautiously optimistic. Management seems to be taking the right steps. And with costs relating to the restructuring coming to an end this year, Melrose looks primed to deliver on its promises. That’s why I think investors may want to take a closer look.
