3 reasons this UK stock could take off like Rolls-Royce
Melrose Industries (LSE:MRO) is a UK stock I like a lot. With the FTSE 100 pushing to new highs, this hugely promising stock seems to be treading water. Of course, this does add to its appeal somewhat. While momentum’s a great characteristic for a stock to have, itâs also great to find those stocks that the market appears to be overlooking.
So here are three reasons I believe Melrose Industries could take off in a manner similar to Rolls-Royce.
The valuation’s undemanding
As I write, Melrose Industries is trading around 15 times forward earnings on an adjusted basis. Itâs important to note that these are adjusted earnings as the company’s been undergoing a major restructuring/transition programme which has significantly impacted its reported profits over recent years.
The adjusted earnings strip out one-off costs and non-recurring items related to the restructuring, giving a clearer picture of the companyâs underlying performance and ongoing operational profitability. However, investors should be aware that these adjustments can mask the true short-term impact of the transition, so careful consideration of the quality and sustainability of earnings is warranted.
Anyway, back to the valuation. At 15 times forward earnings, it trades at a huge discount to Rolls-Royce at nearly 40 times forward earnings. Whatâs more interesting still is that management’s forecasting adjusted earnings per share growth of more than 20% annually through to 2029.
In turn, this suggests the stock’s price-to-earnings-to-growth (PEG) ratio is just 0.75, while Rolls-Royce is closer to 2.5.
An impressive economic moat
More than 70% of Melrose Industriesâ revenue in 2024 came from sole source positions. This means it acts as the exclusive supplier for critical engine and structure components under long-term contracts.Â
This dominance results from their proprietary technology, risk and revenue-sharing partnerships (RRSPs), and established relationships with major engine OEMs like Pratt & Whitney, GE, Safran, and Rolls-Royce.
Melrose holds Tier 1 supplier status on about 90% of active commercial aircraft engines, with exclusive RRSP arrangements on around 74% of those programmes. This ensures resilient, high-margin aftermarket cash flows and strong barriers to entry for competitors.
Aerospace is in demand
Aerospace is a growing industry. The commercial aviation market’s valued at $358.85bn in 2025, expected to increase to $524.14bn by 2030. Meanwhile, commercial aircraft fleets are projected to expand from just over 29,000 aircraft in 2025 to 38,300 in 2035 (CAGR 2.8%). Likewise, global air passenger traffic’s set to grow by 3.6% per annum during the period.
The bottom line
Of course, not everything about Melrose is excellent. The company carries a significant amount of net debt. Interestingly, three years ago analysts were arguing whether Rolls-Royceâs debt was too much of a burden. We know the answer there, but itâs still worth paying close attention to Melroseâs debt position.
Nonetheless, Iâm a big fan. In fact, Iâm slowly making it one of my largest holdings. I believe investors should consider it carefully.
The post 3 reasons this UK stock could take off like Rolls-Royce appeared first on The Motley Fool UK.
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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.
