Melrose Industries (LSE: MRO) has seen its shares rise substantially in the year to date. Am I late to the party or is there still an opportunity to snap up some shares in this flying FTSE 100 stock? Let’s take a look!
Melrose shares on the up!
Melrose is a UK-based aerospace business with a wide geographic footprint. It acquires other businesses that it believes it can improve as well as boost its own offering.
As I write, Melrose shares are trading for 512p. Over a 12-month period, they’re up 88% from 272p at this time last year. In 2023 to date, the shares have grown by 79% from 286p to current levels.
To buy or not to buy?
I reckon a few key factors have helped Melrose shares soar in recent months. Firstly, sentiment and demand in the civil aerospace sector has increased massively. This was perhaps to be expected after a tough few years due to the pandemic. Rolls-Royce shares have also taken off due to this. In addition to this, Melrose has posted excellent results and has moved away from its manufacturing businesses to become a pure play aerospace business. That strategy seems to be working well, in my opinion.
Speaking of results, Melrose’s most recent update – a half-year report released in September – made for great reading. Revenue increased by 19% compared to the previous year and operating profit by more than 2.5 times as well. The business also increased full-year profit guidance which is pleasing to see. An interim dividend of 1.5p was declared as well as a share buyback programme that commenced in October.
With such good results and investor returns, a dividend yield of 1.15% helps build my investment case. However, this is still lower than the FTSE 100 average of 3.9%. Plus, it’s worth remembering dividends are never guaranteed.
On to the bear case, I note that due to the price spike, Melrose shares do look expensive now on a price-to-earnings ratio of over 30 for the current fiscal year. Any drop off in trading or a poor acquisition could send the shares tumbling.
Finally, Melrose does still have a fair 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 costlier. This has the potential to dent performance and returns, as well as investor sentiment.
What I’m doing now
I’ve decided to keep Melrose shares on my watch list for now, once more. I understand the business is doing well, and so are the shares. However, at present, the shares look a bit too expensive for me to part with my hard-earned cash.
My view on Melrose shares might have been different if I had reviewed them much earlier in the year, before they soared. As they say, hindsight is a wonderful thing.
If I were to add any aerospace stock to my holdings, I would look to buy Rolls-Royce shares, which look a safer investment, in my eyes. They look much better value for money and I reckon the firm’s future prospects look a bit brighter.
