Decarbonization And Digitalization Will Accelerate Global Aircraft Demand

Key Takeaways

• Margin expansion and free cash flow growth are set to outpace consensus due to faster restructuring benefits and higher operating leverage as volumes increase.
  
• Technological leadership, strategic partnerships, and global footprint uniquely position Melrose to benefit from aviation trends, supporting sustained top-line and margin growth.
  
• Dependence on aerospace, exposure to trade barriers, and challenges in innovation and integration raise risks to margins, earnings stability, and long-term value.

Catalysts

Designs and delivers aerospace components and systems for civil and defence markets in the United Kingdom, rest of Europe, North America, and internationally.

• Analysts broadly agree Melrose will deliver strong margin expansion and free cash flow as restructuring ends, but this could be understated given H1 performance already exceeded expectations, margin improvement is coming sooner than consensus expects, and both divisions are poised for higher-than-modeled operating leverage as volumes ramp, likely accelerating earnings and free cash flow growth beyond current projections.
  
• Analyst consensus sees platform ramp-up and aftermarket growth supporting high single-digit revenue CAGR, yet this may be conservative as Melrose's unmatched risk-and-revenue-sharing partnerships across 19 civil engine platforms (covering 70% of global flying hours) and accelerating defense commitments from NATO nations create substantial, resilient upside for both top-line growth and multi-decade aftermarket earnings streams well above modeled forecasts.
  
• Demand for Melrose's additive fabrication technology is outpacing management's ability to certify new components, and all major OEMs are urgently pushing for adoption as a workaround to global forging and casting supply constraints; once industrialized, this breakthrough could transform cost structure, speed, and margin across engine programs, driving supernormal margin expansion starting earlier than currently in estimates.
  
• The global aviation push towards decarbonization and next-generation, fuel-efficient aircraft will disproportionately benefit Melrose's advanced components and next-gen engine content, positioning its unique portfolio for a structural uplift in addressable market size, elevated new platform share, and durable premium pricing, which should translate into sustained double-digit revenue growth and long-term EBIT margin uplift.
  
• Melrose's global manufacturing footprint optimization and local-for-local strategies (especially via its China/COMAC joint venture and automation-heavy new sites in Malaysia and the US) are creating an operational moat, increasing customer stickiness, and positioning the company to capitalize on surging emerging market air travel, which will provide long-term upside to both recurring revenue and normalized gross margins as scale builds.

Melrose Industries Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Melrose Industries compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Melrose Industries's revenue will grow by 10.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 9.2% today to 9.8% in 3 years time.
• The bullish analysts expect earnings to reach £450.9 million (and earnings per share of £0.43) by about August 2028, up from £316.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 29.0x on those 2028 earnings, up from 23.4x today. This future PE is greater than the current PE for the GB Aerospace & Defense industry at 24.7x.
• Analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.31%, as per the Simply Wall St company report.

Melrose Industries Future Earnings Per Share Growth

Risks

• Melrose's significant exposure to geopolitical risks and trade protectionism is highlighted by recent tariff disruptions and ongoing vigilance around new trade barriers, which could increase costs, add supply chain complexity, and negatively impact both revenue growth and operating margins over the long term.
  
• The accelerating global transition to net zero and electrification in aviation may require substantial capital investment in sustainable and greener technologies; if Melrose is unable to rapidly innovate or adapt its existing product lines, this could lead to increased regulatory costs and shrinking net margins.
  
• Melrose's heavy reliance on the commercial aerospace sector, especially on major programs with Airbus, Boeing, and narrow/wide-body engines, leaves it vulnerable to sector downturns, supply chain shocks, and fluctuations in aircraft production rates, all of which could create significant volatility in both revenue and operating earnings.
  
• Challenges in achieving and sustaining operational efficiencies post-restructuring-as seen in persistent supply chain and production ramp-up delays-raise the risk of elevated restructuring costs or execution failures, potentially depressing long-term net margins and free cash flow.
  
• With high levels of acquired goodwill and intangible assets and the risk that integration or synergy assumptions do not materialize-especially in the context of potential underperformance from acquired businesses or new technologies-Melrose remains exposed to the possibility of large impairment charges, sharply reducing reported net earnings and book value over time.

Valuation

• The assumed bullish price target for Melrose Industries is £8.25, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Melrose Industries's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £8.25, and the most bearish reporting a price target of just £4.05.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £4.6 billion, earnings will come to £450.9 million, and it would be trading on a PE ratio of 29.0x, assuming you use a discount rate of 8.3%.
• Given the current share price of £5.83, the bullish analyst price target of £8.25 is 29.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.