Could this overlooked FTSE 100 stock be the next Rolls-Royce?

Melrose Industries (LSE:MRO) may not command the same headlines as Rolls-Royce, but the FTSE 100 engineering group is quietly delivering a transformation story that’s hard to ignore. Its latest full-year results for 2024, coupled with forecasts and its own targets, suggest this could be a company to watch.

Earnings set to surge

For the year ended 31 December 2024, Melrose reported revenue of £3.5m, up from £3.4m million in 2023, representing 11% like-for-like sales growth. Meanwhile, operating profit surged to £540m, a 42% increase from 2023. Adjusted diluted earnings per share (EPS) jumped to 26.4p, a 45% rise from 18.7p in 2023.

The numbers look even more compelling when set against consensus forecasts. Analysts expect EPS to reach 34p by 2026, which would mark a further 29% increase from 2024’s already-strong result.

Such growth is underpinned by Melrose’s unique business mix, as well as share buybacks. The company generates 53% of sales from high-margin aftermarket services, providing a resilient revenue stream even when original equipment manufacturing (OEM) cycles soften. 

Its Engines division, which supplies both civil and defence aerospace, grew sales by 26% in 2024 and delivered a 40% jump in operating profit, with margins expanding to an impressive 28.9%.

Lofty targets

Melrose’s five-year targets are ambitious but feasible. Management’s aiming for revenue of £5bn and operating profit north of £1.2bn by 2029, with group margins expected to exceed 24%. This would be a significant uplift from the current 15.6%.

Free cash flow is also set to rebound, with £600m targeted, compared to a £74m outflow in 2024. This 2024 figure was affected by restructuring and legacy issues.

However, the growth story isn’t without risks. Net debt increased to £1.32bn in 2024, up from £572m the previous year, largely due to share buybacks and ongoing investment. Clearly, management believes the company’s growth will outpace the cost of servicing growth.

This brings the leverage ratio to 1.9 times, within the company’s target range but still something to monitor as debt maturities loom in 2026. The company will likely refinance these obligations.

The bottom line

Despite missing some market expectations on revenue, I’m quite intrigued my the stock’s value proposition. The company is currently trading at 14 times forward earnings. That’s a fraction of where its aviation peer Rolls-Royce is now trading.

It’s also targeting EPS growth above 20% in the years to 2029. If it can come anywhere near this figure, I’d suggest the company’s vastly undervalued. There’s also a modest dividend to account for. The yield currently sits around 1.5%, rising to 2%.

What’s more, the average share price target is 32% above the price today. Analysts think the stock should be trading at 632p per share. I’m actually wondering if it could go higher if it delivers on its targets.

It’s certainly a stock investors should take a good look at. I certainly will.

The post Could this overlooked FTSE 100 stock be the next Rolls-Royce? appeared first on The Motley Fool UK.

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James Fox has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Melrose Industries Plc 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.