The Melrose (LSE: MRO) share price has performed strongly this week and is currently up by 7% in the past five days. Investors have been anticipating the release of Melrose’s strong interim report, out on Thursday (2 September).
The results show that Melrose is trading ahead of expectations and has significantly reduced net debt. However, there are possible headwinds coming its way. Here, I look ahead to see if the British manufacturing company’s momentum will hold steadfast.
Interim report gives the Melrose share price a boost
Melrose’s interim report has come as a surprise for me as it has really exceeded expectations.
Melrose has seen a huge reduction in its net debt from £3,399m to just £300m. Free cash flow generated reached £75m, and the earnings to share price rose to 2.2p. Revenue also rose from £3.3bn in 2020 to £3.5bn.
There is also more good news for shareholders who are looking to make passive income by investing in Melrose. The company announced that on 14 September it will be returning £729m, at 15p per share.
These figures are certainly impressive considering the forecasted headwinds which could affect the aerospace and automotive sectors. However, in its report, Melrose stated that its automotive business is currently in a good position to benefit from the move to EV. A third of all its booking platforms are coming from wholly electric platforms. This comes to 50% of all bookings if you also include full hybrid platforms.
Melrose is also confident that it is well placed with its aircraft business being bolstered by high demand from defence spending and its re-shift in focus to faster narrow-body aircrafts.
Although it seems that Melrose is defying headwinds with its strong interim report, I’m still concerned over future volatility in the aerospace marketplace. Melrose generates a large proportion of its revenues from aerospace manufacturing. Therefore the company could suffer as the sector is expected to drop by 25%-30% in the next year.
Melrose could face further challenges to growth due to forecasted issues in supply chains and Covid-related disruptions. I believe the reason why the Melrose share price hasn’t jumped exponentially on the back of its interim report is because of these long-term risks.
Should I buy?
Melrose has shown excellent resilience in its interim report for the sixth months ended 30 June. The company has beaten expectations with its focus on key growth markets such as electronic vehicles. For me, a company that can recover well is always a good indicator that it will prove well for ROI.
However, I’m unsure if Melrose will be able to keep this momentum going as the aerospace market becomes increasingly volatile. I see more difficult challenges ahead for this company. Because of this, I expect to see the Melrose share price suffer and so, I won’t be adding this share to my portfolio for the time being.
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John Town has no position in any of the shares mentioned. The Motley Fool UK has recommended Melrose. 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.
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