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Melrose Industries (LSE: MRO) has seen its shares rise substantially so far this year. Am I late to the party or is there still an opportunity to grab some shares of this plane? FTSE 100 stock? We’ll see!
Melrose stock is on the rise!
Melrose is a UK-based aerospace company with a wide geographical presence. It acquires other businesses that it believes it can improve as well as boost its own offering.
As I write, Melrose shares are trading at 512p. Over a 12-month period they rose 88% from 272p this time last year. So far in 2023, the shares have grown 79% from 286p to current levels.
To buy or not to buy?
I think a few key factors have helped Melrose stock soar in recent months. First, sentiment and demand in the civil aerospace sector has increased tremendously. Perhaps this was to be expected after a difficult few years due to the pandemic. Rolls-Royce stocks have also taken off because of this. In addition to this, Melrose has achieved excellent results and has moved away from its manufacturing businesses to become a dedicated aerospace business. In my opinion, that strategy seems to be working well.
Speaking of results, Melrose’s most recent update (a semi-annual report released in September) was a great read. Revenue increased by 19% compared to the previous year and operating profit also more than 2.5 times. The company also raised its full-year earnings guidance, which is nice to see. An interim dividend of 1.5p was declared, as was a share buyback program that began in October.
With such good results and profitability for investors, a dividend yield of 1.15% helps me build my investment case. However, this is still lower than the FTSE 100 average of 3.9%. Also, it’s worth remembering that dividends are never guaranteed.
As for the bearish case, I note that due to the price increase, Melrose stock looks expensive now with a P/E ratio of over 30 for the current fiscal year. Any drop in trading or a bad acquisition could send the stock tumbling.
Finally, Melrose still has quite a bit of debt on its books. This is risky in the high-interest economy we find ourselves in, as it means servicing this debt could be more expensive. This has the potential to impact performance and profitability, as well as investor sentiment.
what I’m doing now
I’ve decided to keep Melrose stock on my watch list for now, once again. I understand that business is going well and so are the stocks. However, currently, stocks seem too expensive for me to part with my hard-earned money.
My opinion on Melrose stock might have been different if I had reviewed it much earlier, before it skyrocketed. As they say, hindsight is a wonderful thing.
If I were to add aerospace stocks to my holdings, I would look to buy Rolls-Royce shares, which seem like a safer investment in my opinion. They seem to be a much better value for money and I think the company’s future prospects look a little better.
