Is Now the Time to Buy Melrose Industries?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Melrose Industries  (LSE: MRO  ) to determine whether you should consider buying the shares at 242 pence.

I am assessing each company on several ratios:

Price-to-earnings (P/E): Does the share look good value when compared against its competitors?

Price-to-earnings to growth (PEG): Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend cover: Is the dividend sustainable?

So let's look at the numbers:

Price

3-Year EPS growth

Projected P/E

PEG

Yield

3-Year Dividend Growth

Dividend Cover

242p

(36%)

13.7

1.4

2.9%

10%

2.1

The consensus analyst estimate for this year's earnings per share is 17.7 pence (10% growth) and dividend per share is 8.1 pence (7% growth).

Firstly, let me start by saying that, Melrose is an unusual company, which specializes in buying out underperforming manufacturing firms, turning them around and then selling them on. However, due to the nature of this business, the company's earnings figures have been skewed by one-off events, such as the sale of the company's turned-around businesses. After removing these one-off events, my calculations lead me to believe that the company has actually grown its earnings by a compounded 23% over the past three years.

Anyway, trading on a projected P/E of 13.7, Melrose appears cheaper than its peers in the industrial engineering sector, which are currently trading on an average P/E of around 20.

Offering a 2.9% yield, Melrose's dividend yield is slight more than the sector average of 2.5%. In addition, Melrose has a three-year compounded dividend growth rate of 10%, implying the yield could continue to stay above that of its peers.

Finally, the dividend is more than two times covered by earnings, giving Melrose plenty room for further payout growth.

So, is now the time to buy Melrose Industries?
Unfortunately, like the majority of its peers in the industrial engineering sector, continuing uncertainty in the global economy is affecting Melrose as the company's customers delay or even cancel orders.

Indeed, during 2012, Melrose's lifting division -- which accounts for 47% of group turnover -- saw orders fall by 10% from the previous year. In addition Melrose's energy arm, responsible for more than 40% of company revenue, saw orders fall by 12%.

Having said that, as I have written above, Melrose's earnings are expected to grow an additional 10% this year, however, the majority of this growth is expected to come from the company's newest acquisition, Elster. In fact, after discounting Elster's additional earnings, I believe that Melrose is unlikely to see any underlying earnings growth at all.

However, Melrose is currently trading at a discount to its sector peers and overall the company continues to grow, so, I feel that now looks to be a good time to buy Melrose Industries at 242 pence.

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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.


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