Melrose (LSE:MRO) shares don’t usually grab headlines, but that may be exactly why they look so interesting ahead of 2026.
The aerospace group sits at the heart of global aviation supply chains, supplying highly engineered components that aircraft simply cannot fly without. Through GKN Aerospace, Melrose is a Tier 1, sole-source supplier to every major civil and defence aircraft manufacturer — a position that takes decades to build and is almost impossible to dislodge.
This matters because aerospace is one of the most protected industrial markets in the world. This means it has a sizeable economic moat and strong pricing power.
What’s more, programmes last for decades, certification barriers are immense, and around 70% of Melrose’s revenues come from contracts where it is the exclusive supplier.
The company has exposure to roughly 90% of active commercial and military engines globally, giving it exceptional visibility on future revenues.
It’s also important to note that Melrose is not just dependent on new aircraft builds. Its aftermarket business — covering maintenance, repair and overhaul — provides high-margin, recurring income that holds up even in downturns.
In 2024, aftermarket revenues jumped 32%, supported by recovering flight hours and resilient defence demand.
Despite this quality, the valuation remains modest, especially compared to peers.
The shares trade on about 15.1 times forward earnings, with a price-to-earnings-to-growth (PEG) ratio of 0.8, well below aerospace peers. Management is targeting annual earnings growth above 20% through 2029.
For content, here’s how it compares to peers.
| COMPANY | FORWARD P/E (2026) | PEG |
|---|---|---|
| Melrose | 15.1 | 0.8 |
| Rolls-Royce | 40.7 | 2.7 |
| GE Aerospace | 49.3 | 3.2 |
| Safran | 35 | 1.8 |
These imply the stock is undervalued to its peers by two-to-three times.
Of course risk remains. Debt of roughly £1.67bn and supply-chain disruption is been a theme over the past decade. Nonetheless, it’s definitely worth considering.
A very small US peer
Small companies often go under the radar. And that can be a good thing. In November I identified Innovative Aerospace (NASDAQ:ISSC) as one to consider. I bought it and it doubled in value. It was a nice early Christmas present.
There’s a little bit of profit-taking going on now, and I’m not sure that’s necessarily the right thing to do. The company’s long-term target involves reaching $250m in annual revenue with an EBITDA margin of 25%-30%.
That infers top-end EBITDA of $75m and at the current price that’s a forward enterprise value-to-EBITDA ratio of 4.5. The sector average is 12.4 times. This suggests that Innovative Aerospace is still considerably undervalued despite the share price doubling over the past six weeks.
The caveat, of course, is that this is the long-term target. Not next year.
The risks? Well, there could be some lumpiness with regards to the acquisition from Honeywell. That doesn’t appear to be the case at the moment but time will tell.
Still, definitely worth considering.
