As trading opened on Thursday on the London stock exchange, Melrose Industries (MRO) shares made substantial gains for the third day in a row. At the beginning of the week, the stock was trading at 93.1p, however, after a steady rise, it has now reached 125p. This means that in just a three day period MRO has surged by more than 34%.
The business itself has its headquartered in London, UK. It specializes in acquiring and managing underperforming businesses. One of the largest acquisitions the company made was back in 2018, when it purchased GKN, after a successful £8.1 billion bid. According to the 2019 report, the firm had annual revenue of £11.6 billion, with operating profit reaching £1.1 billion.
Over the years, the firm delivered impressive returns to its shareholders. According to the annual report, if an individual invested just £1 back in 2005 in Melrose Industries, nowadays that investment would be worth £26.79. The document also states, that since its foundation, the company returned £4.7 billion to shareholders.
This policy also had a positive effect on share price performance. As the 2019 annual report suggests Melrose Industries stock was 2nd highest performer in terms of total shareholder return over the past decade.
As we can see from the above chart, the stock was trading at 160p back in June 2019. During the subsequent months, it has made steady gains eventually reaching 250p by February 2020. However, then the stock fell victim to the March stock market crash. By the beginning of April, it dropped just below the 75p level. This was followed by two months of indecisive fluctuations. Yet, the recent impressive 34% rise might mark an end to the bear market for MRO. Although it might be useful to keep in mind, that even at this stage, the shares have to rise by 100% in order to return to February highs.
Current Valuations of MRO Stock
The firm paid dividends to investors since 2006. by 2019 the total annual payout to shareholders reached 4.75p per share. In 2020, due to challenges, imposed by the COVID-19 pandemic the board decided to cancel the final dividend payment. So far it is unclear whether this will be just one-off decision or this state of affairs will persist for several years to come. In any case, if the firm manages to somehow restore those payments at previous levels, then at current prices the dividend yield for this stock will be 3.8%. This can be quite a reasonable rate of return for income investors. This seems especially true in times when the Bank of England keeps its interest rates at 0.1%.
What is not so impressive, is the valuation of stock on Price to Earnings basis. According to CNBC, the earnings per share indicator for Melrose Industries is 0.95p. This points to the fact that the P/E ratio of the firm stands at 131.6. It is understandable, that since the company purchases underperforming businesses, this might have some negative effect on its earnings. Yet, even after taking this eventuality into account, this still seems the case of extreme overvaluation. The stock might become more attractive if its price falls further or if the firm manages to significantly expand its earnings.