After jumping 16% in a month is this FTSE aerospace giant the best share to buy today?

Harvey Jones is looking for the best share to buy over the next few weeks and wonders if now’s the perfect time to invest in this under-the-radar FTSE 100 stock.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ask the average investor to say which FTSE 100 civil and defence engineer they thought was the best share to buy and most would land on Rolls-Royce or BAE Systems.

So let’s hear it for Melrose Industries (LSE: MRO), the forgotten stock of the aerospace and defence sector. I feel it may offer a better opportunity than both Rolls and BAE, both of which I own but look fully-priced right now.

Shares tend to slip people’s minds when they don’t go anywhere for a while. The Melrose share price has been easy to ignore. It’s down 25.11% over five years, and 0.98% over the last 12 months.

Yet this can make them attractive to contrarian investors, who know the early stages of the recovery are most rewarding.

Can this FTSE 100 stock keep climbing?

That’s the case with Melrose, whose shares have suddenly jumped 16.45% in the last month. What’s going on?

The bounce came after it published figures on the 19 joint ventures it holds with engine manufacturers on 28 October. Under these Risk and Revenue Sharing Partnerships (RRSPs), Melrose shares in the ongoing revenues of the engines it supplies parts for. 

The contracts can run for 50 years, and provide a steady stream of cash from maintenance and parts replacements. Melrose anticipates £22bn of RRSP cash flows over the next 25 years. My back-of-a-fag-packet maths suggests this is worth £880m a year. This could be worth investors who buy shares with a long-term view (as all of us at The Fool do) investigating.

Melrose got a further lift on 5 October when Citi named it a “high-conviction” Buy, predicting free cash flow would range from £450m-£550m in 2027/28, beating consensus of £320m-£420m.

Civil aerospace is a bumpy sector, as we saw in the pandemic. The Melrose share price crashed from 570p to 175p during lockdown. It’s struggled since, posting pre-tax losses in the four years to 2023.

Underlying revenues climbed 13% to £3.35bn in 2023 and rose another 6.7% in the first half of this year to £1.7bn. Underlying operating profit hit £247m, as rising aftermarket activity boosted its Engines division. It’s whittled down net debt to £976m. Supply chain issues are proving a drag though.

Melrose Industries ain’t half a mixed bag

The Melrose dividend took a beating in the pandemic but is steadily recovering. The trailing yield is a lowly 0.99%. Let’s see what the chart says.


Chart by TradingView

Melrose has one thing in its favour. It looks cheap with a price-to-book (P/B) ratio of 1.7 on 30 September. That’s way below the average P/B of 7.6 for the aerospace and defence sector. I imagine it’s probably a bit pricier since the recent share price hop.

However, a price-to-sales ratio of 1.8 is only a tad behind the sector average of 1.9. Its price-to-earnings ratio of 26.45 doesn’t grab me either.

The 10 analysts offering one-year share price targets setting a median figure of 593.6p. That’s up 17.25% today. Promising.

Yet I’m always wary of buying a stock after it’s suddenly jumped, in case I make an instant loss as others take profits. The long-term outlook is positive, but Melrose still has work to do in the short run. I’m tempted, but there are other FTSE 100 shares I’d rather buy today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in BAE Systems and Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »