Cast your mind back four years and Rolls-Royce, today one of the FTSE 100‘s most celebrated turnaround stories, was a company in serious trouble. It was burning cash, drowning in debt — largely because of the pandemic — and its shares were slumping. Today, it carries a market-cap approaching £100bn and an operating margin close to 25%.
The thing is, everyone knows Rolls-Royce. And that’s probably down to the car brand they don’t own.
But not everyone knows Melrose Industries (LSE:MRO). It’s a different company, same script.
Pure-play aerospace
Melrose has spent recent years shedding automotive and other non-core divisions to emerge as a focused aerospace supplier, making advanced components and systems for all major original equipment manufacturers. These include Boeing, Airbus, GE, and Safran. That’s a great list of customers.
The business spans civil and defence markets. Crucially, it holds sole source positions across much of its business — around 70%.
What’s more, these are long-term, often exclusive supply agreements for specific parts on specific aircraft. Once embedded on a programme, Melrose is typically there for the life of that aircraft — often 25-30 years.
The revenue is recurring — the switching costs are enormous, and the barriers to entry are high. It’s exactly the kind of quality business with an embedded structural competitive advantage that made Rolls-Royce so rewarding for patient investors.
The turnaround in numbers
In 2022, Melrose reported an operating loss of £246m on a margin of -8.33%. Full-year 2025 results showed operating profit of £600m and an operating margin of 16.72%. Normalised EPS hit 33.1p last year — up 70% — pointing to the company trading at 16 times earnings.
The dividend’s growing at 20% a year. And the 16 analysts covering the stock have a consensus price target of 693p — more than 30% above today’s price of around 515p.
On an earnings basis, there’s cause to argue it’s still undervalued. Rolls trades at more than double Melrose’s forward price-to-earnings (P/E) of just 13.2 times. The price-to-eanrings-to-growth (PEG) ratio of 0.9 is vastly discounted versus many other aerospace/industrial stocks.
The bottom line
Of course, there are risks and concerns. Net debt’s risen to £1.74bn and free cashflow’s only just turning positive. The balance sheet leaves limited room for error if civil aviation demand softens or defence programme timing slips. This is a genuine risk and worth watching closely.
However, the shares are down 22% from their 52-week high, caught in the broader turbulence of the year. For long-term investors, the combination of sole source positions, a transformed margin profile, and the prospect of strong earnings growth from this valuation makes it well worth considering.
And honestly, I wouldn’t be surprised to see it push towards all-time highs later this year, especially if the conflict in the Gulf comes to an end and interest rates continue to push downward.
