Melrose Industries PLC

Overview

This report analyzes Melrose Industries PLC (LSE:MRO), an aerospace and defense Tier‑1 supplier, using William J. O’Neil’s CAN SLIM framework. It synthesizes the latest company-reported results and guidance with market data to assess growth, quality, and timing for investors.

Financial and Business Overview

Business model: Melrose is now a pure-play global aerospace and defense technology group operating through two divisions: Engines (risk-and-revenue-sharing partnerships, non-RRSP OE, repairs, and governmental) and Structures (design-to-build aerostructures, EWIS, transparencies). It is a ‘Super-Tier 1’ partner with embedded, often sole-source positions across leading civil and defense platforms. Scale and profitability: 2025 guidance (at $/£ 1.335) calls for £3.425–£3.575bn revenue and £620–£650m adjusted operating profit with Group margins ~18% for 2025; H1 2025 adjusted operating profit rose 29% YoY to £310m with margin up 380 bps to 18.0% (Engines margin 33.4%, Structures 6.7%). Adjusted diluted EPS in H1 2025 was 15.1p (+30% YoY). Cash and leverage: Free cash flow is guided to £100m+ for 2025; H1 free cash outflow improved by £91m to £54m due to higher earnings and lower restructuring. Net debt at 30 June 2025 was £1.404bn (2.0x ND/EBITDA), within covenant headroom. Buybacks of £250m are underway (c.£91m completed by H1 2025). Balance sheet snapshot (FY 2024): Total assets £7.44bn, liabilities £4.59bn, equity £2.84bn; book value per share ~£2.21. Working capital was negative (FY 2024 working capital -£171m) reflecting typical aero program cash dynamics and customer advances. Valuation and trading: Price 634.6p (GBp), trailing P/E ~25.4x on TTM EPS ~25p; P/B ~2.9x (price ~£6.35 vs book ~£2.21). Dividend ~6.0p (≈1% yield). Average analyst rating: Buy.

Market Position & Competitive Advantages

Position: Embedded, life-of-program content across 19 engine RRSPs (≈70% of global flight hours coverage) plus broad Structures content with >70% sole-source civil/defense positions. Structural tailwinds include record civil backlogs (narrowbody/widebody) and accelerated defense outlays (NATO/EU), driving OE ramps and aftermarket growth for decades. Moats and advantages: - High switching costs: Design-led, certified content integrated into platforms for program life. - Aftermarket annuity: Mature engines (e.g., V2500, CFM56) plus growing fleets (GEnx, XWB, GTF) provide multi-decade cash flows; Engines margin already >33%. - Technology leadership: Breakthrough additive fabrication (first and only certified major structural engine component in serial transition by end-2025), participation in next-gen engines (CFM RISE, next-gen GTF), and advanced composites/EWIS. - Operational transformation: Multi-year footprint consolidation (52 to 32 sites), repricing (85% of defense portfolio sustainably repriced 6 months early), lean ‘Brilliant Basics’ driving safety/quality/productivity gains. Key risks (be honest): - Tariffs/supply chain: US tariff regime and aerospace casting/forging constraints create complexity and working capital friction (mitigations in place but residual risk persists). - Concentration & program risk: GTF powder metal remediation costs (~£70m in 2025/26) and pacing of OE build rates can affect variable consideration timing and cash flows. - Leverage and cash conversion: Leverage ~2.0x; FCF inflects in 2025 but remains modest this year; variable consideration accounting and negative working capital require disciplined execution. - Governance optics: Shareholders rejected the directors’ remuneration report at the 2025 AGM (non-binding), highlighting sensitivity to pay alignment.

Stock Performance

Price: 634.6p; 52-week range 376p–682.6p; currently ~7% below the 52-week high and ~35% above the 52-week low. 50-day average ~607p; 200-day average ~542p, indicating an established uptrend. One-year total price change ~+34.9%. Average daily volume ~3.6m shares. The share has been resilient on improving margins, clearer cash inflection, and buyback support, with episodic volatility around tariff headlines and FX.

CAN SLIM Analysis

Conclusion

Melrose aligns well with CAN SLIM: accelerating quarterly EPS and margin expansion (C), improving annual earnings and a credible 5-year profit/FCF roadmap (A), multiple new product/technology and contract catalysts plus recent new highs (N), buybacks and strong platform demand (S), leadership characteristics and relative strength (L), robust institutional coverage (I), and a favorable sector trend despite macro crosswinds (M). Risks—tariffs/supply chain, GTF remediation cash flow, and leverage ~2.0x—are acknowledged but manageable with mitigations in place and cash generation inflecting in 2025. Tactically, consider adding on a constructive pullback toward the 50-day (~607p) or on a high-volume breakout above ~683p in line with O’Neil’s rules.