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The FTSE 100 is dominated by global giants like HSBC, AstraZeneca and Rolls-Royce. These understandably hog much of the limelight.
However, there are several global Footsie firms with market caps below £10bn that have plenty of room to grow. Here’s one such FTSE 100 stock that has sold off this year.
Sharp pullback
Aerospace group Melrose Industries (LSE:MRO) has seen its share price drop 29% since February. Currently, its market cap is just £5.9bn.
The catalyst in February was soft forward guidance for 2026 that fell short of market forecasts. Then in May there was a chemical leak scare at one of the group’s GKN Aerospace plants across the pond.
Melrose has set up a $100m compensation pot for 50,000 evacuated residents, for things like hotel stays, meals, transportation, and loss of wages. But we don’t know how much it will end up costing in total due to the disrupted operations. In the meantime, a £175m share buyback has been paused to preserve cash.
Thinking long term
For patient investors though, there could be an attractive opportunity here because the long-term outlook remains very bright. Melrose has an established presence on all of the world’s leading aircraft and engines, whether through airframe structures or engine components (often both).
Indeed, its components and technology are on‑board around 100,000 flights a day, including narrowbody and widebody aircraft, business jets, and fighter jets. Similar to Rolls-Royce then, the firm offers investors exposure to both rising international travel and higher defence spending.
Melrose has a portfolio of 19 engine partnerships, entitling it to a share of lucrative aftermarket profits as the engines rack up more flying hours. By 2028, all of these programmes are set to be cash positive, helping deliver £600m in free cash flow for the group by 2029. That would be a substantial improvement on last year’s £125m.
Melrose is targeting operating margins of 24% by 2028, up from 18% last year.
Shareholders should see decades of cash flows from the Engines aftermarket, with profits that should grow substantially.
Melrose Industries.
What about valuation?
Last we heard, the company was targeting this week to resume full production at the impacted US plant. Any delay to this timeline wouldn’t be ideal, of course, while the Middle East conflict continues to put pressure on global supply chains.
However, the underlying business is ticking along nicely. In the first half of the year, revenue grew 10% to £1,873m, adjusted operating profit jumped 16%, and the operating margin ticked up 50 basis points to 18.5%.
The interim dividend increased 13%, and the forward yield is currently around 2%. A moderate level of potential income adds to the appeal.
Following the recent share price weakness, the stock looks cheap, trading at just 11 times forward earnings. That’s far cheaper than Rolls-Royce, albeit the engine giant is firing on all cylinders.
For investors willing to take a long-term view, I think Melrose stock is worth thinking about. It could have big turnaround potential in the FTSE 100.
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Ben McPoland owns shares in HSBC and Rolls-Royce.
This story originally appeared on Motley Fool
