Up 12% in a month! Is this overlooked FTSE growth share the next Rolls-Royce?

I’m on the hunt for a dynamic growth share or two for my Self-Invested Personal Pension (SIPP), and Melrose Industries (LSE: MRO) has caught my eye. The FTSE 100 stock has jumped 12% in a month, although it’s down 10% over a year. Is this a one-off bounce or that start of something bigger?

I’ve barely covered Melrose before, but its story feels eerily familiar. Like Rolls-Royce, it’s got fingers in both the civil and defence aerospace pies.

Its Engines division supplies all the big jet makers and earns just over half its revenues from the juicy aftermarket engine service phase. This counterbalances the more cyclical sales market, softening the blow when new orders slow. It’s also building a fast-growing parts repair business.

FTSE 100 recovery play?

Melrose’s Structures arm makes fuselage and electrical systems for all the big-name aircraft, with decent exposure to both US and European defence to boot. Which is obviously a good area to be in, as Europe rearms to stand up to Russia, and Middle East turmoil continues.

Back in April, Melrose said revenue from Engines rose 9% in Q1, while Structures climbed 4%. Group revenue was up 6% year-on-year. That’s a decent clip. Operating profit came in well ahead of last year, and management said cash and debt levels were tracking as expected. US tariff threats will cause disruption, but look survivable.

The board also set some punchy growth targets for 2029. This included £5bn in revenue, more than £1.2bn in profit, and a 24% margin, up from 15.6% today. It’s also chasing free cash flow of £600m. That would be quite a turnaround from the £74m outflow this year, caused by restructuring and legacy clean-up.

The shares are flying

I’m a little concerned by net debt, which has more than doubled to £1.32bn in 2024. That’s hefty for a £6.5bn company which needs to roll over some chunky loans by 2026. That could prove harder if inflation and interest rates start climbing and credit market conditions get tougher.

Supply chain snarl-ups have hampered operations lately, and haven’t gone away. Management kept its 2025 guidance “cautious” for that reason.

On paper, the valuation looks tempting. The price-to-earnings ratio sits at just 14.2, way below Rolls-Royce at nearly 44 and FTSE 100 defence stock BAE Systems at 28. However, there’s no guarantee that will close. Civil aerospace’s no easy ride. All it takes is bad weather, a volcano, a war, or a global slowdown, and flights get grounded. Investors know how fast revenue can evaporate.

The trailing dividend yield of 1.15% looks meagre but the dividend per share was hiked 33% in 2022, 115% in 2023, and another 20% this year to 6p a share. However, much of that was restoring pandemic damage. In 2018, the dividend was 4.6p.

Low valuation, high hopes

Analyst forecasts suggest the stock could climb another 19% over 12 months. Seven out of 12 rate it a Strong Buy, with just one Sell. If the world keeps getting more dangerous, Melrose’s defence links could become even more valuable.

Sadly, I can’t imagine it can pull a Rolls-Royce-style moonshot. Rolls was in a mess when transformative boss Tufan Erginbilgiç took over in 2023. Melrose is in a better place. But I still think it’s worth considering today.

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Harvey Jones has positions in BAE Systems and Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems, 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.