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Share tip of the week

Each week, our analysts put the spotlight on a company from our list of recommended shares to buy. As always, it's recommended as a medium/long term investment (approximately 18 to 36 months). This week's share tip of the week is...

Melrose Industries (MRO)

  CompanySectorCurrent price
(pence)
Change
today
  
Investment
objective

Risk
Our
view
 Melrose Industries (MRO)Industrial Engineering 196.75 -0.13%   BalancedMedium Buy
 Analysis last updated on 20/01/17 at 196pRecommended stop loss of 15%

View charts, and further company data

Company overview

Melrose policy is to buy companies, usually engineering, with the aim of improving operational performance and then selling off parts at a future date.

Our view

Under/over valued?


We have long been fans of the group and the attractions of the company and its aims of 'buy, improve, sell'. The model it operates of an engineering buyout firm makes Melrose a quoted private equity type investment. Management have many years experience and success in the engineering field.

In 2016 there was the much anticipated news of their next acquisition; US group Nortek, a manufacturer of cooling and heating systems for $1.44bn. The deal was financed by a rights issue and new debt. This will gear the group to the US housing market, where Nortek sells the majority of its products too. Management see potential for improving performance by refocusing its product range, overhauling the supply chain, debt structure and back office, leading to improved margins.

Interim results in July, which related to Brush only (a manufacturer of electricity generating equipment), reported a pretax loss of £9.2m. Challenging market conditions continued for Brush, although actions taken should help performance. The dividend was 1.4 pence.

A trading update in November stated that the first two months of Nortek had been encouraging, with many actions taken. It also expects Brush to have a stronger second half.

The timing of the Nortek deal has been viewed positively by the market, especially in light of the new president and his pro-US policies. We are happy to suggest investors buy for the chance of further long term growth and cash returns.


Bullish points

• Management have an excellent track record on improving businesses that it has acquired.

• Improving and selling off businesses can lead to investors receiving special dividends.

• The sale of Elster in 2015 demonstrated once again the ability of management and its business model.

• A new Chinese factory could benefit Brush sales.

• Potential for management to improve margins at Nortek.



Bearish points
.


• Sales have been subdued at Brush and profits are set to fall this financial year.

• There is always an element of risk attached to improving a new business.


Comment updated 20 January 2017

Author: Graham Spooner, Investment Research Analyst


The facts

Below are the trailing 12 month results to the end of the final period versus the previous 12 month trailing period. As we are reporting rolling returns below, the data will be different to that which you see on other parts of our web site. Results are as follows

Current

Basic Earnings per Share -1.7
Dividend per Share 8.1
Dividend Yield 2.4
Revenue 261m
Operating Profit 166m
Cash on the Balance Sheet £71m
Dividend Cover

Previous

Basic Earnings per Share 4.4
Dividend per Share 8.1
Revenue 761m
Cash on the Balance Sheet
Dividend Cover

Change

Basic Earnings per Share
Dividend per Share
Revenue
Operating Profit
Cash on the Balance Sheet
Dividend Cover

Forecast Estimates 2018
Earnings per share 10.6
P/E 18.4
Dividend yield 1.8%

Month(s) company is expected to go ex-dividend
March
August

View our previous recommendations

Please read our investment research policy to understand how our analysts reach their recommendations.



Valued using at least 15 minute delayed prices (where available)

Prices may fluctuate and appear inconsistent with the day's trading on or around the opening and closing of the stock market. This is due to the pre and post market auctions for certain LSE stocks, this is usually between 07:30 and 08:15 and from 16:30 until 17:00. The day's closing prices are indicated with a "c" against the price.