The Melrose Industries (LSE:MRO) share price has been on a roller coaster this year.
It’s fallen sharply from the closing record highs of 677.6p per share it recorded in April. In fact, the FTSE 100 firm slumped again on Thursday (1 August) following the release of half-year trading numbers.
At 539.2p per share, Melrose shares are currently dealing 8.4% lower in today’s session.
But what’s caused investors to charge for the exits? And does the recent share price slide represent a buying opportunity?
Strong first half
Melrose actually put in a solid performance in the first half, data today showed. In fact, revenues for the six months to June sailed past City forecasts.
Revenues rose 6.7% in the period, to £1.7bn. This meant that adjusted operating profit soared 55.3% year on year, to £247m.
Once again, sales and profits generated by its Aerospace operations continue to impress. Engines turnover rose 21%, while Structures revenue increased 6%, helped by strong aftermarket activity and healthy demand from defence customers.
Adjusted operating margins at Aerospace rose 420 basis points, to 14.9%, with margins at Engines beating predictions thanks to that robust aftermarket segment.
As a result of this, adjusted operating profit at Aerospace rose 48.5% year on year, to £260m.
… but supply-side turbulence
The bad news for Melrose’s share price is that markets are forward looking. So while these first-half numbers were solid, investors haven’t taken kindly to the business also trimming revenues forecasts for 2025.
The Footsie firm said it remains on track to hit profit targets for the next two years. This is in spite of “ongoing industry-wide supply chain challenges” for its Aerospace unit.
However, Melrose now expects full-year Aerospace revenue of around £3.8bn next year. That’s down from a previous forecast of £4bn.
The market was less moved by the company upgrading adjusted operating margin guidance for 2025, to 18%. This is up from the previously predicted 17% to 18%.
A top dip buy?
So what are we to make of Melrose and its share price decline? Well firstly, it’s important to remember that the company’s shares soared almost a third in value in the 12 months to April’s record highs.
So it’s easy to see why some investors may be tempted to take profits in recent weeks. Indeed, news of supply chain problems — an ongoing problem across the aerospace sector — has given them more reason to cash out.
Recent share price weakness isn’t a reflection of Melrose’s long-term profits outlook, however. In fact, the firm’s focus on the aerospace sector gives it a good chance to deliver market-beating profits potential.
Strong demand from defence customers is likely to continue as countries embark on rapid re-arming. The business should also benefit from a steady increase in the global commercial aviation fleet as passenger numbers soar. In this landscape both aftermarket and components sales should take off.
And Melrose shares look a lot cheaper than those of fellow aerospace engineer Rolls-Royce. Its forward price-to-earnings (P/E) ratio sits at 20.1 times, far below the 32.5 times for Rolls shares.
On balance, I think Melrose could be a great potential dip buy for patient investors. And especially at current prices.
This post was originally published on Motley Fool
