Will the Melrose share price deliver a near 90% upside?

Last week, JP Morgan slashed its target for the Melrose Industries share price to 215p from 240p. Yet that still represents a near 90% upside on Friday 6 May’s close. Other analysts have similarly lofty price targets.

Considering that other parts of the markets are set for limited gains this year, investors might want to dig deeper. Melrose [MRO.L] has considerable exposure to the aerospace industry, which was rocked during the worst of the pandemic era. However, with the industry beginning to show signs of recovery, Melrose’s share price could benefit. Still, there remain substantial headwinds to overcome.

What’s happening with the Melrose share price?

Melrose’s share price has slumped 29.02% so far this year, closing Friday 6 May at 113.5p. Over the past month those losses have continued, with the stock down almost 7%. As it stands, Melrose’s share price is trading around the levels seen back in August 2020 and well off the intraday high of 208.94p seen on 3 January 2021.

Which analysts back the Melrose stock?

JP Morgan’s revised price target and ‘overweight’ rating represents a bullish position considering the direction of Melrose’s share price this year. However, the bank isn’t alone in rating the company’s chances. Citigroup reiterated its ‘buy’ rating and 200p target on the Melrose share price on 13 April. The same day, Royal Bank of Canada reiterated its 220p price target and ‘outperform’ rating on the stock. In March, Barclays reiterated its ‘overweight’ rating and 205p target.

The 10 analysts offering 12-month price targets for Melrose have a median target of 202.5p, suggesting a 78.4% upside on Friday’s close, as reported by the Financial Times. Melrose has five ‘buy’, five ‘outperform’ and three ‘hold’ ratings from analysts.

Should investors take note?

Cost saving initiatives have boosted Melrose’s fundamentals. In 2021, revenue came in at £7.5bn, while adjusted operating profits tripled to £375m. For income seekers, Melrose proposed a final dividend of 1p a share, up from 0.75p in 2020. Combined with the 2021 interim of 0.75p, the works out as a total return of 1.75p a share in 2021.

In September last year, the company had returned £730m to shareholders following the sale of its US air conditioning business. A second payout was announced for this year should business recover as expected, although this has been put on ice for the time being with Melrose citing market uncertainty due to the war in Ukraine.

What headwinds are facing Melrose’s share price?

Not everyone is enamoured with the stock. Bank of America recently downgraded the stock to ‘neutral’ from ‘buy’, and trimmed its price target to 130p from 206p. And it would be churlish to pretend there were no significant headwinds facing Melrose in 2022.

Melrose’s restructuring efforts last year saw it sell off a large chunk of the company to boost underlying profits. This year the group’s automotive division will face supply chain issues which could weigh on margins. In aerospace, travel demand remains below pre-pandemic levels and fuel prices are climbing, even if the market is improving. Cost inflation could also drag on revenues with the simple fact being things are more expensive than what they once were.

Melrose chief executive Simon Peckham struck an optimistic note in his outlook for 2021, saying that “against the backdrop of the ongoing market recovery” the company was in “good shape to deliver strong returns and realise shareholder value”. Peckham cautioned that while there would be growth in the aviation side of the business, it will remain below pre-pandemic levels.

On inflation, Peckham wrote that the business would mitigate inflationary pressures and was “fully committed” to achieving operating margin targets. Investors will have to decide whether Melrose can hit both its and analyst targets.