Image source: Getty Images
He Melrose Industries The (LSE:MRO) share price has been on a rollercoaster ride this year.
It has fallen sharply from the record closing high of 677.6 pence per share it recorded in April. In fact, FTSE 100 Index The company fell again on Thursday (1 August) following the publication of its commercial figures for the first half of the year.
At 539.2 pence per share, Melrose shares are currently trading 8.4% lower in today's session.
But what has prompted investors to cash in on exits? Does the recent share price drop represent a buying opportunity?
Strong first half
According to data released today, Melrose has delivered a solid first-half performance. In fact, revenue for the six months to June far exceeded the city’s forecasts.
Revenue rose 6.7% in the period to £1.7bn. This meant that adjusted operating profit rose 55.3% year-on-year to £247m.
Once again, sales and profits generated by its aerospace operations continue to impress. Engine sales increased by 21%, while structures revenue increased by 6%, thanks to strong aftermarket activity and good demand from defence customers.
Adjusted operating margins in Aerospace increased 420 basis points to 14.9%, and margins in Engines beat forecasts thanks to that strong aftermarket segment.
As a result, adjusted operating profit in the aerospace sector increased by 48.5% year-on-year to £260 million.
…but turbulence on the supply side
The bad news for Melrose's share price is that markets are looking ahead. So while these first-half figures were strong, investors have not welcomed the business. also cutting revenue forecasts for 2025.
Footsie firm said it remains on track to meet profit targets for the next two years. This is despite “Current challenges across the supply chain industry” for its Aerospace unit.
However, Melrose now expects annual revenues of around £3.8bn from the aerospace sector, down from its previous forecast of £4bn.
The market was less affected by the company's improved adjusted operating margin forecast for 2025, which stood at 18%. This is up from the 17% or 18% previously forecast.
A buy with a higher dip?
So what are we to make of Melrose and its falling share price? First, it's important to remember that the company's shares rose by almost a third in the 12 months leading up to the all-time highs in April.
So it's easy to understand why some investors may have been tempted to take profits in recent weeks. Indeed, news of supply chain issues – a constant problem across the aerospace sector – has given them more reason to pull back on their shares.
However, the recent weakness in the stock price does not reflect Melrose's long-term earnings prospects. In fact, the company's focus on the aerospace sector gives it a good chance of generating market-beating earnings.
Strong demand from defence customers is likely to continue as countries embark on rapid rearmament. The business should also benefit from a steady increase in the global commercial aviation fleet as passenger numbers soar. Against this backdrop, both aftermarket and component sales should take off.
And Melrose shares look much cheaper than those of its fellow aerospace engineer. Rolls RoyceIts forward price-to-earnings (P/E) ratio stands at 20.1 times, well below Rolls' 32.5 times.
Overall, I think Melrose could be a great potential dip buy for patient investors, especially at current prices.
