Will the Melrose share price recover in 2021?

first_imgWill the Melrose share price recover in 2021? Zaven Boyrazian owns shares in Melrose. 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. The Melrose Industries (LSE:MRO) share price took an enormous hit at the start of the pandemic. But now that the vaccine rollout is progressing relatively quickly, it’s back on the rise. And over the last 12 months, it has nearly doubled. Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. The company has yet to make a complete recovery. But the question is, can it return to its pre-pandemic levels this year?5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…The business and the impact of Covid-19I’ve previously explored Melrose’s business model. But as a quick reminder, it works similarly to private equity firms. Using its ‘Buy, Improve, Sell’ strategy, it identifies companies within the engineering sector that aren’t living up to their full potential. Melrose then acquires them and begins making necessary improvements to maximise their profitability. And after a few years, it looks to sell them on as much stronger and more valuable businesses.The pandemic has and continues to disrupt many industries. But the aerospace sector has been particularly hit hard by Covid-19. And unfortunately, Melrose has considerable exposure to it. The firm recently published full-year results for 2020, and the impact of the pandemic was made perfectly clear. Total revenue fell by 20%, while losses came in at £523m. So why is the Melrose share price going up?The rising Melrose share priceDespite these seemingly poor results, upon closer inspection, there are some encouraging signs of growth. The increase in losses is not too concerning to me. Why? Because the management team stated in advance that it had adjusted its strategy to focus on cash generation rather than profits in 2020.While this resulted in dividends being cut, shareholders gave their blessing. And it seems to have worked. Free cash flow increased by 6% to £628m, despite the unfavourable operating environment. This helped bring down total debt by around 25% and ensured R&D budgets weren’t compromised. As a result, Melrose appears to be in a much stronger financial position, despite reporting a massive loss – quite an unusual achievement. So I’m not surprised to see its share price rise.In terms of its enterprises, only the civil aerospace portion of Melrose’s portfolio seems to be struggling. Its automotive and power metallurgy divisions both saw margins and sales improve. Meanwhile, the company is also disposing of its Nortek Air Management business for $3.6bn. It originally acquired Nortek in 2016 for $2.8bn. But considering this business generated around $1bn of cash flow, it effectively places the purchase price at $1.8bn. In other words, the investment generated 15% annualised returns for the last five years. That’s not bad at all if I say so myself.The bottom lineOverall, Melrose looks in relatively good health, with plenty of cash to see it through the remainder of the pandemic. What’s more, with travel restrictions beginning to ease, its civil aerospace division may soon be returning to growth.Having said that, I don’t believe the Melrose share price will return to its pre-pandemic levels in 2021. Nortek generated around 13% of the revenue stream last year, which is obviously going to disappear when the disposal is complete. But the sale proceeds will ultimately be used to pay down debts, contribute to pension funds, and the excess will be returned to shareholders. Therefore, I won’t be selling my shares any time soon. 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More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge! Zaven Boyrazian | Monday, 17th May, 2021 | More on: MRO Our 6 ‘Best Buys Now’ Shares “This Stock Could Be Like Buying Amazon in 1997”last_img

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