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The Melrose share price has fallen 60%. Here’s why I’m buying

Rupert Hargreaves
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The Melrose (LSE: MRO) share price has fallen close a staggering 60% since mid-February. Investors have been selling the stock due to concerns about the company’s ability to survive the coronavirus outbreak.

As Melrose is one of the largest engineering groups in the UK, its success is closely linked to UK economic growth.

As the country’s economy has been shut down to contain the virus outbreak, Melrose’s operations have ground to a halt.

Management has acted quickly to try to stabilise the group. In a recent trading update, the business announced that it had stopped all non-essential expenditure. It is also making use of government schemes to pay employees to reduce pressure on cash flows.

The dividend has been stopped, and the company has agreed with its lenders to waive the covenants on its debt. This will give Melrose some financial breathing space over the next few months. At the end of February, the group had headroom of £1bn on its credit facilities.

Melrose share price on offer

The company’s actions should help Melrose weather the current economic storm. They should also ensure that the group is ready to roar back to life when the government’s economic restrictions are lifted.

That’s why now could be an excellent time to buy-in to the Melrose share price. The business has a great track record of creating value for shareholders. Indeed, until the recent stock slump, the company’s 10-year total return for investors was one of the best in the FTSE 100.

That being said, this isn’t an investment for the faint-hearted. In the last crisis, it took the Melrose share price several years to recover from the global economic shock that rocked the world. It could take even longer for the company to recover this time.

Experienced team

Still, Melrose is managed by a highly experienced team. These managers have decades of combined experience turning struggling businesses around and improving efficiency. This experience should help the company’s recovery when the global economy starts up again.

So, if you’re willing to take a long-term view, Melrose looks to be a great investment at current levels. It is dealing at a price-to-book (P/B) ratio of just 0.6. This suggests that the whole business is worth a minimum of 155p per share, an upside of 56% from current levels.

In the best-case scenario, the Melrose share price could be worth a lot more than this base value. However, at this stage, it is impossible to tell when the business will return to normal. So the P/B ratio seems to give the best indication of value right now.

The bottom line

Therefore, if you’re looking for an undervalued bargain, and are willing to take a long-term view, it might be worth taking a closer look at the Melrose share price after recent declines.

With its experienced management team and strong balance sheet, the company appears to have the qualities needed to pull through the current uncertainty and come out strongly on the other side.

The post The Melrose share price has fallen 60%. Here’s why I’m buying appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Melrose. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020