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Despite a steep sell-off in early April, the stock market has started to rally, with the FTSE 100 already up 10% from last month’s lows. And overall, the UK’s flagship index is actually up by almost 3% since the start of the year, putting it on track to hit its historical average of 8% by the end of 2025.
Does this mean it’s too late for investors to capitalise on the buying opportunities this recent round of volatility created? Of course not!
While the FTSE 100 might be climbing higher, not all of its constituents have fully recovered from the uncertainty. And there’s one business in particular that I’ve recently bought more shares of during the turbulence.
A hidden value opportunity
Of the many stock market companies sold off on the back of US tariff concerns, Melrose Industries (LSE:MRO) remains one that’s yet to bounce back. With operations spanning the globe and a lot of customers sitting in America, the Melrose share price took a 20% hit across the first week and a half of April.
Since then, tariff-related concerns have started to calm. The US has pulled back on a lot of its initial tariff policies and seems to be taking a more measured approach following the outcry of concern from investors. So while the story’s far from over, it’s enabled Melrose to begin recovering by 14% in the following weeks.
As a quick crash course, Melrose acts as a key middleman within the aerospace supply chain of some of the biggest commercial and defence companies in the world including the likes of BAE Systems, Rolls-Royce, and Lockheed Martin.
As such, its parts and technologies can be found on board 70% of the world’s wide- and narrow-body aircraft. And beyond generating income from selling components to the aircraft manufacturer, the company has a flourishing aftermarket services business, helping to maintain commercial and military aircraft worldwide.
In short, it’s a critically important enterprise to the aerospace industry. So when seeing such a business trade for an underlying forward price-to-earnings ratio of just 12.7, thanks to market volatility, the value investor in me starts to sit up.
Explosive potential
While the stock market sell-off is partially to blame for the weak valuation, Melrose’s unloved status isn’t new. The company’s in the middle of a massive restructuring that’s adding a lot of complexity to the financial statements. This makes it difficult to build a clear picture of what’s coming down the line.
However, when digging through the weeds, if everything goes according to plan, Melrose could be generating £600m of annual free cash flow paired with £5bn revenue and £1.2bn in underlying profits by 2029. And on that basis the stock’s looking very cheap at today’s valuation, in my opinion.
Of course, nothing’s ever guaranteed. A return of aggressive global tariffs could throw a massive spanner into the aerospace supply chain, causing the firm to miss its targets. At the same time, Melrose is somewhat at the mercy of the cyclical nature of the aerospace industry.
These risk factors can’t be ignored. But at today’s valuation, it’s a risk investors might want to consider taking. And it’s why I recently bought more shares for my portfolio.
