Bank of America has reiterated its 'buy' rating and 720p price target on Melrose Industries PLC (LSE:MRO, OTC:MLSPF), the FTSE 100 aerospace group, arguing the shares look cheap as they trade close to their lowest level this year.
Melrose, which owns the GKN Aerospace engineering business, is due to report half-year results with its stock near a 12-month low.
The broker said the underlying picture was stronger than the share price suggested, pointing to an April trading update that showed group revenue up 11% and a rise in adjusted operating profit across both divisions.
The engines business remains the main driver, having grown 20% in the first quarter, and Bank of America expects 18% growth for the first half.
That momentum is being led by repairs, military work and deliveries under risk and revenue-sharing partnerships, arrangements in which Melrose shares the cost and income of engine programmes with manufacturers.
The airframes division, which makes aircraft structures, is more mixed, with strength in defence offset by softer civil demand.
The broker said the evacuation of the company's Garden Grove facility in California in May had probably dented structures growth and margins in the second quarter, and it expects a roughly 7% airframes margin in the first half.
Civil airframe growth should improve in the second half as Airbus increases aircraft deliveries after a weak start to the year.
Bank of America expects cash generation to remain a focus for investors, with a free cash outflow in the first half in line with last year at about £60 million.
Free cash flow measures the cash a company produces after capital spending.
The broker expects the company to repeat its full-year guidance of £150 million to £200 million in free cash flow, and sees generation stepping up towards £250 million to £300 million in 2027.
It said Melrose traded on an implied free cash flow yield of about 11% against its 2029 forecast, a level it found increasingly hard to justify on the downside.
A broadly in-line set of half-year figures could reinforce confidence in a floor for the valuation, the broker added.
