Investments In Engines Capability And Additive Fabrication Will Drive Future Success

Key Takeaways

• Strategic restructuring and business realignment aim to boost margins and cash flow, driving strong earnings and profitability growth.
  
• Investments in aftermarket capabilities and new technologies focus on enhancing operational efficiency and supporting substantial revenue and EPS expansion.
  
• Ongoing supply chain issues, tariffs, and customer production cuts are threatening revenue growth and impacting net margins and cash flow.

Catalysts

Provides aerospace components and systems to civil and defence markets in the United Kingdom, rest of Europe, North America, and internationally.

• The launch of new 5-year targets reflects Melrose's confidence in future growth, with expectations to achieve high single-digit CAGR in revenue, leading to £5 billion by 2029, which indicates forward revenue growth expectations.
  
• The completion of a multiyear transformational restructuring program, alongside significant margin expansion, should lead to increased net margins, with targets to exceed 24% margin from business improvement initiatives and volume increases.
  
• Advances in aftermarket mix and steps taken to expand capacity, such as investments in Engines capability and additive fabrication technology, are expected to drive future earnings growth.
  
• Their focus on realigning their business as an aerospace technology company positions Melrose to deliver substantial free cash flow, targeting £600 million post interest and tax, which will positively impact cash flow and overall financial health.
  
• Continuous improvement in operational efficiency and productivity on a restructured base, combined with portfolio rationalization, should enhance operating profit to at least £1.2 billion, supporting strong EPS growth of over 20% CAGR over the next 5 years.

Melrose Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Melrose Industries's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.4% today to 8.5% in 3 years time.
• Analysts expect earnings to reach £362.2 million (and earnings per share of £0.32) by about March 2028, up from £-49.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £447 million in earnings, and the most bearish expecting £293 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.3x on those 2028 earnings, up from -141.6x today. This future PE is greater than the current PE for the GB Aerospace & Defense industry at 25.4x.
• Analysts expect the number of shares outstanding to decline by 2.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Melrose Industries Future Earnings Per Share Growth

Risks

• Ongoing supply chain challenges and specific customer destocking have caused revenue shortfalls, which could continue to impact future revenue growth negatively.
  
• The company has tempered its revenue guidance for 2025 due to continuing supply chain issues in the aerospace industry, which could adversely affect revenue predictions.
  
• Newly introduced tariffs on products imported into the U.S. pose an uncertain risk, which may impact the company's costs and therefore its net margins.
  
• Recent announcements of reduced production rates from key customers like Airbus indicate potential headwinds for expected revenue growth.
  
• The substantial financial impact of ongoing restructuring and difficulties with powder metal issues are expected to continue into 2025, potentially affecting net margins and cash flow negatively.

Valuation

• The analysts have a consensus price target of £7.008 for Melrose Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £10.0, and the most bearish reporting a price target of just £4.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £4.3 billion, earnings will come to £362.2 million, and it would be trading on a PE ratio of 28.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of £5.41, the analyst price target of £7.01 is 22.9% 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.