Melrose Industries (LSE:MRO) is a UK stock I like a lot. With the FTSE 100 pushing to new highs, this hugely promising stock seems to be treading water. Of course, this does add to its appeal somewhat. While momentum’s a great characteristic for a stock to have, it’s also great to find those stocks that the market appears to be overlooking.
So here are three reasons I believe Melrose Industries could take off in a manner similar to Rolls-Royce.
The valuation’s undemanding
As I write, Melrose Industries is trading around 15 times forward earnings on an adjusted basis. It’s important to note that these are adjusted earnings as the company’s been undergoing a major restructuring/transition programme which has significantly impacted its reported profits over recent years.
The adjusted earnings strip out one-off costs and non-recurring items related to the restructuring, giving a clearer picture of the company’s underlying performance and ongoing operational profitability. However, investors should be aware that these adjustments can mask the true short-term impact of the transition, so careful consideration of the quality and sustainability of earnings is warranted.
Anyway, back to the valuation. At 15 times forward earnings, it trades at a huge discount to Rolls-Royce at nearly 40 times forward earnings. What’s more interesting still is that management’s forecasting adjusted earnings per share growth of more than 20% annually through to 2029.
In turn, this suggests the stock’s price-to-earnings-to-growth (PEG) ratio is just 0.75, while Rolls-Royce is closer to 2.5.
An impressive economic moat
More than 70% of Melrose Industries’ revenue in 2024 came from sole source positions. This means it acts as the exclusive supplier for critical engine and structure components under long-term contracts.
This dominance results from their proprietary technology, risk and revenue-sharing partnerships (RRSPs), and established relationships with major engine OEMs like Pratt & Whitney, GE, Safran, and Rolls-Royce.
Melrose holds Tier 1 supplier status on about 90% of active commercial aircraft engines, with exclusive RRSP arrangements on around 74% of those programmes. This ensures resilient, high-margin aftermarket cash flows and strong barriers to entry for competitors.
Aerospace is in demand
Aerospace is a growing industry. The commercial aviation market’s valued at $358.85bn in 2025, expected to increase to $524.14bn by 2030. Meanwhile, commercial aircraft fleets are projected to expand from just over 29,000 aircraft in 2025 to 38,300 in 2035 (CAGR 2.8%). Likewise, global air passenger traffic’s set to grow by 3.6% per annum during the period.
The bottom line
Of course, not everything about Melrose is excellent. The company carries a significant amount of net debt. Interestingly, three years ago analysts were arguing whether Rolls-Royce’s debt was too much of a burden. We know the answer there, but it’s still worth paying close attention to Melrose’s debt position.
Nonetheless, I’m a big fan. In fact, I’m slowly making it one of my largest holdings. I believe investors should consider it carefully.
