Rolls-Royce shares or Melrose Industries: Which one is better value for 2026?

Rolls-Royce shares surged in 2025, surpassing most expectations. Dr James Fox considers whether it offers better value than peer Melrose.

| More on:

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Rolls-Royce (LSE:RR) shares are approaching all-time highs once again. The stock is up 101% over one year as I write. It’s high on momentum, both operationally and in terms of the share price.

It doesn’t have many peers in the UK, but one company operating in similar segments is Melrose Industries (LSE:MRO). Melrose has surged from lows in April, but it’s only up around 5% over the past 12 months — nothing like the performance of Rolls-Royce.

So, which one offers better value as we move into 2026?

What the numbers tell us

Rolls-Royce isn’t clearly undervalued as it was a couple of years ago. It now trades around 36.1 times forward earnings and has a price-to-earnings-to-growth (PEG) ratio of 2.8.

Some would argue that this is vastly overvalued, but you have to remember that Rolls-Royce is a quality company. It’s got huge economics moats and offers long-term prospects in the form of small modular reactors in addition to its flourishing defence and aviation businesses.

A significant net debt position in 2021 — £5.2bn for a company with a market cap of less than £10bn — has transformed. It now sits on £1.1bn in cash and the market cap is £97bn.

Melrose, one the other hand, is in the early stages of a business transformation. The valuation reflects that. It trades around 16.1 times forward earnings with a PEG ratio of 0.7.

The balance sheet isn’t as robust as Rolls’, however. Net debt sits at £1.6bn versus a market cap of £7.2bn.

Both companies offer a dividend. Melrose at 1.3% and Rolls at 0.8.

What does this tell us? Well, Melrose definitely appears to be better value to me.

Quality is also key

Rolls-Royce shares have pushed higher than I expected, I must confess. It’s an incredible company, with very few competitors in most of the areas in which it operates. This contributes to improving margins. Rolls-Royce’s operating margin reached 19.1% for the first half of 2025.

However, Melrose is equally strong and potentially overlooked. The company reported a first-half margin of 18%, up from 14.2% a year previous. It also has a sole-source position on 70% of its sales. This is an incredibly attractive statistic, suggesting it has enormous pricing power because its customers don’t have other options.

In terms of risks, Rolls-Royce would experience a pullback if we were to see a renewed slowdown in global air travel, delays, or cost overruns in its civil aerospace programmes. However, the defence and power systems business offers diversification.

Melrose also has that diversification, but arguably to a lesser extent. Both are heavily exposure to civil aviation and defence spending.

So, it’s possible that Rolls-Royce has more quality factors — better margins, better balance sheet, and more diversification.

Better value into 2026

For me, however, I believe Melrose offers better value. Using the PEG ratio, Rolls-Royce is 400% more expensive. I’m just not sure the gap should be that big. I own both these stocks, and I believe both are worth considering. However, Melrose is certainly my favourite.

James Fox has positions in Melrose Industries Plc and Rolls-Royce Plc. The Motley Fool UK has recommended Melrose Industries Plc and Rolls-Royce Plc. 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.

More on Investing Articles

Investing Articles

2 stocks to buy before they bounce back in 2026?

Buying undervalued stocks is a great way to try and build wealth. But it’s even better when the companies are…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

1 of the FTSE 100’s best bargains to consider for 2026!

Royston Wild discusses a top FTSE 100 share he owns in his portfolio -- and explains why he think it's…

Read more »

British Pennies on a Pound Note
Investing Articles

On a P/E ratio of just 3, is this penny stock a deep bargain?

Christopher Ruane previously made a profit buying and later selling this penny stock. Why has he bought it again, with…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

I’ve bought this 6.6%-yielding FTSE 250 share, hoping for a 2026 price recovery

This FTSE 250 share has more than halved in the past five years. But it still offers an attractive dividend…

Read more »

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

A once-in-a-decade chance to buy these UK income shares cheap?

The investing focus in 2026 might just be returning to long-term income shares after a roller-coaster decade for the UK…

Read more »

A GlaxoSmithKline scientist uses a microscope
Investing Articles

Up 9.9%! Here’s why Oxford Nanopore stock topped the FTSE 250 today

This innovative company's stock price marched higher today in the FTSE 250 index. Might this be my first Stocks and…

Read more »

Tesla building with tesla logo and two teslas in front
Investing Articles

Tesla stock’s defied gravity before. Can it do it again?

Could Tesla stock really be worth close to 300 times earnings -- or more? Christopher Ruane explains his thinking about…

Read more »

Businessman with tablet, waiting at the train station platform
Investing Articles

As Greggs’ share price dives, is this a once-in-a-decade opportunity?

The Greggs share price looks incredibly cheap on paper. But does this represent an attractive dip-buying opportunity? Royston Wild investigates.

Read more »