The Melrose Industries (LSE: MRO) share price has had a cracking year so far in 2023, up 93% in 12 months at the time of writing.
It is still a bit below its pre-Covid levels though, after the aerospace business took a pandemic hammering.
The stock didn’t move much on 16 November, when the firm released an upbeat trading update. It seems the expectations were already built into the buoyant share price.
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Better than expected
Melrose posted an 18% rise in revenue for the four months to the end of October. The firm also said its margins are “substantially better than expectations.”
For the full year, the board now expects revenue of between £3.3bn and £3.4bn. We should also see profit doubling compared to last year, and 7% ahead of earlier expectations.
Early signs suggest 2024 could bring revenue of £3.5bn to £3.7bn, with profit 4% ahead of what the market expects.
Time to buy?
So, with the Melrose share price soaring, and things going so well, are we looking at a cheap growth buy here?
I’ve liked the business itself, for a long time. But I’ve always found the stock to be hard to put a valuation on. And that’s mostly down to what Melrose has historically done, and how it does it.
Melrose is in the aerospace business. And it has a track record of buying up ailing companies, which it turns around, and occasionally offloads for a profit.
It’s done that well, I’d say. But it means profits have swung swing wildly from year to year.
The next two years
Still, the firm’s key focus is now on the aerospace business, and I’d hope that should keep things more stable in the future.
It counts Rolls-Royce among its big-name customers. And that’s done very well from the recovery in the civil aviation business this year, after the pandemic.
But a look at broker forecasts shows what I mean about a tricky valuation. The consensus suggests good earnings growth in the next two years.
That puts the price-to-earnings (P/E) at over 30 for 2023, dropping to about 20 in 2024. That might be fair for a growth stock. But forecasts for next year are very uncertain. Oh, and I used Yahoo! for these figures, but different sources show very different forecasts.
Good to buy?
Considering that kind of outlook and uncertainty, against an aerospace sector that might be getting a bit too hot right now, I really don’t know what a good valuation might look like.
The dividend yield is only a bit over 1%, so it seems there’s no real income stream likely to come from Melrose. At least, not in the medium term.
I recall Warren Buffett’s urging: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
This might indeed be a wonderful company. But I can’t tell if the Melrose share price is fair. At least, not at a time when aerospace stocks are high profile and popular. I’ll pass, for now. Maybe it’ll cool.
