I’m backing this FTSE 100 industrial stock to outperform Rolls-Royce
Melrose Industries (LSE:MRO) is a FTSE 100 company that manufactures (deep breath) advanced aerospace engine components, aerostructures, landing gear, electrical wiring systems, transparencies, and ice protection systems for civil and defence aircraft. It serves all the major Original Equipment Manufacturers (OEMs) worldwide as a sole-source supplier.
Underappreciated business
Yes, thatâs right⦠a sole-source supplier. This is an incredibly strong position to have within the aerospace industry, and one that suggests it should be trading with a massive premium. This sole-source status isn’t easily replicated. It reflects decades of engineering excellence, deep integration with customers, and significant investment in advanced manufacturing.
As a Tier 1 supplier, Melrose, through its GKN Aerospace division, has established positions on 90% of active commercial and military engines worldwide, with risk and revenue-sharing agreements covering 74% of these programmes.
Whatâs more, around 70% of Melroseâs revenues are derived from long-term contracts in which it’s the exclusive supplier of vital engine and structural components.Â
Valuation comparison
Despite this really strong market positioning, Melrose trades with a valuation that’s a fraction of its aerospace peers. Currently, the stock has a forward price-to-earnings (P/E) ratio of around 14.1 times, on an adjusted diluted basis.
| Company | Forward P/E (2025) | Dividend Yield (2025) |
|---|---|---|
| Melrose | 14.1 | 1.8% |
| Rolls-Royce | 34.8 | 1% |
| GE Aerospace | 44.6 | 0.5% |
| Safran | 23 | 1.1% |
As we can see, companies in this sector tend to trade with strong earnings multiples. This reflects strong growth trajectories for the sector but also impressive economic moats. Aerospace and defence has huge barriers to entry.
And while Melrose does carry some net debt (around £1.3bn), I simply canât see why this quality business is undervalued. It maintains a well-balanced portfolio between civil aviation and defence, allowing it to benefit from both the cyclical growth in commercial aerospace and the stability of defence markets.
Its technology features in over 100,000 flights daily, serving major engine OEMs such as Pratt & Whitney, GE, Safran, and Rolls-Royce. This broad customer base and platform diversity help shield Melrose from sector-specific downturns. The companyâs dual revenue streams â OEMs and aftermarket services â are its strength.
In other words, OEM sales drive growth during upcycles, while the aftermarket, including maintenance and repairs, ensures resilient, high-margin revenue even in downturns. In 2024, aftermarket revenue rose 32%, supported by both commercial and military demand.
The bottom line
Supply chain constraints remain a risk for Melrose, as ongoing disruptions have forced the company to lower its 2025 revenue outlook, from £4bn to £3.8bn. These challenges, particularly in critical components, have impacted aircraft production at major customers such as Boeing and Airbus, limiting Melroseâs growth potential.
Despite this, the company’s looking to grow earnings by more than 20% annually in the years to 2029. The ambitious five-year targets include 43% revenue growth and doubling operating margins.
Personally, Iâm very bullish on Melrose. It think it deserves more attention and is worth considering.
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James Fox has positions in Melrose Industries Plc and 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.
