If you follow the stock market, you’ll be aware that Rolls-Royce (LSE:RR) shares have surged around 1,000% over the past three years. It’s become the FTSE 100’s crown jewel. What’s more, its valuation is in line with its peers in the US — that doesn’t happen too often. It’s a reflection on the confidence investors have in this firm.
One investment that has caught my eye in recent months in Melrose Industries (LSE:MRO). In fact, it’s now one of my largest investments. The company’s current position, characterised by an ongoing transition and beaten-down stock, reminds me of Rolls-Royce three years ago. Even its market cap and net debt position are similar.
What is Melrose Industries?
Melrose Industries is a UK-based aerospace engineering group that primarily operates through two divisions — Engines and Structures, via its GKN Aerospace subsidiary. It supplies critical components and systems across civil and defence markets. In turn, this generates recurring aftermarket revenue through long-term contracts like risk‑and‑revenue‑sharing partnerships (RRSPs).
A key strength is its sole‑source positioning. In 2024, over 70% of Melrose’s revenues came from long-term, exclusive supplier contracts for engines and airframe structures. It holds Tier‑1 status on roughly 90% of active aircraft engines worldwide, and about 74% of those operate under RRSP arrangements. This reflects deep integration with major OEMs like Pratt & Whitney, GE and even Rolls‑Royce. All of this contributes to pricing power.
Similar to Rolls?
While Melrose lacks the global brand recognition and scale of Rolls‑Royce, both firms benefit from long‑cycle, aftermarket service revenue. However, Melrose’s business is narrower, focused on supplying components under exclusive contracts. Rolls-Royce brings end-to-end engine design, manufacturing, and propulsion systems alongside broader energy and marine operations.
Melrose’s USP lies in its recurring, high‑margin aftermarket cash flows. These are derived from the aforementioned long‑term sole‑source supplier roles. That economic moat, coupled with a relatively modest forward price-to-earnings (P/E) 13.9 times, positions it as an interesting value play in aerospace.
Earnings and forecast
Melrose shared jumped on 1 August after the group delivered a strong set of interim results for the six months to 30 June 2025. Revenue rose 6% on a like-for-like basis to £1.72bn, while adjusted operating profit jumped 29% to £310m.
Importantly, operating margins expanded by 380bps to 18%, reflecting solid execution and the nearing completion of a multi-year transformation programme. Free cash flow improved by £91m year-on-year, with the group on track to exceed £100m for the full year. Full-year guidance was maintained in constant currency terms despite supply chain and tariff pressures.
These results reflect the company’s progress, and could mark a turning point for the stock. Management has forecast earnings growth in excess of 20% annually for the medium term, but now investors may actually start to believe it.
Risks include supply chain constraints that are a constant struggle in this industry. And I believe investors need to watch over the company’s net debt position carefully. However, I believe the positives vastly outweigh the negatives. I think it’s an investment that deserved to be considered by investors.
