Key Morningstar Metrics for Melrose Industries
- Fair Value Estimate: GBX 800
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
What We Thought of Melrose Industries’ Earnings
Amid strong 2025 results, Melrose MRO guided for a softer near‑term growth path. In 2025, revenue grew 8% like-for-like, driven by midteens growth in engines. Margins grew 240 basis points to 18%, and free cash flow turned positive above £100 million, a key inflection after years of restructuring.
Why it matters: Shares went down 13% as management guided 2026 sales to £3.75 billion–3.95 billion, operating profit to £700 million–750 million, and free cash flow to £150 million–200 million. While solid in absolute terms, this represents a more measured progression than the faster ramp implied by prior messaging
- Revenue growth is paced by external constraints, with civil OE and structures volumes limited by airframer supply chains and defense programs still in early ramp-up. This delays revenue recognition but does not alter demand, backlog, or medium-term growth potential.
- Margins and cash flow remain on track as mix shifts toward higher-margin engines, aftermarket and defense pricing discipline holds, restructuring cash costs have ended, and working capital/capital expenditures are tightly managed.
The bottom line: We maintain our FVE of GBX 800 supported by structurally higher margins following restructuring, the continuing strength of engines’ aftermarket demand, improving RRSP economics, and building defense exposure.
- Aftermarket growth is supported by aging, heavily utilized fleets and low retirements, driving high-margin, cash-generative revenue. Record backlogs and rising NATO defense demand provide multi-year visibility, with proprietary manufacturing and deep customer integration supporting resilience even as global volatility persists.
- We expect cash generation to strengthen on structurally higher margins and inflect as GTF matures, with restructuring complete, reducing downside risk. Management reiterated £600 million of free cash flow by 2029 and extended buybacks alongside a higher dividend, signaling confidence in cash durability.
