On Thursday, Kepler Cheuvreux adjusted its stance on Melrose (LON:MRON) Industries PLC (MRO:LN) (OTC: MLSPF) stock, moving the rating from Buy to Hold and altering the price target to GBP6.30, up from the previous GBP5.40. The firm attributes its decision to the current valuations of aerospace engine companies, which are considered to be excessively high.
According to Kepler Cheuvreux, the market's high valuation of aerospace engine stocks no longer appears rational. The firm pointed out that while long-term, low-yield growth may be appealing in a market with low interest rates, a weak US dollar, and disinflation, these conditions do not favor Melrose's financial situation. The company's free cash flow (FCF) is expected to lag behind until the end of the decade, despite its high profit margins.
The analyst also highlighted challenges with Melrose's accounting policies, which add complexity to the analysis of the company's financials. The need for clearer guidance from management on mid-term FCF margins was emphasized as a critical factor for analysts to accurately assess the company's valuation.
Furthermore, Kepler Cheuvreux noted that the current share price exceeds their discounted cash flow (DCF) valuation of 578p, which is based on a weighted average cost of capital (WACC) of 8.7%. Additionally, the firm mentioned that the price is also above what would be suggested by a 17 times price-to-earnings (P/E) ratio, indicating a discrepancy between their valuation methods and the market price.
The adjustment in Melrose Industries' stock rating and price target reflects the firm's analysis of the company's financial performance and market conditions as of the date of the report.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.