Stock of the week: Melrose Industries
We have long been fans of Melrose Industries’ strategy of buying businesses that are underperforming to improve and eventually sell on. Management have many years’ experience and an excellent track record of improving businesses it has acquired. This was demonstrated by the purchase of Elster in 2012 for £1.8bn which is the company sold for £3.3bn in 2015.
The group’s latest acquisition, US group Nortek, a manufacturer of cooling and heating systems was acquired in 2016 for $1.44bn. This deal gears the group to the US housing market, where Nortek sells the majority of its products too. Management saw potential for improving its performance by refocusing its product range, overhauling the supply chain, debt structure and back office, leading to improved margins. Interested investors should note that Nortek’s performance is exceeding expectations and its prospects are better than originally thought.
In August, the firm reported a rise in interim pre-tax profit from £6.2m to £131.1m with sales of £1.09bn. Investors will be interested to know that management stated they remain on track with planned improvements at Nortek. They also reiterated that the search for the next acquisition is ongoing.
We are happy to recommend Melrose Industries as a ‘buy’ for the chance of further long-term growth and cash returns. This stock is suitable for those seeking a medium level of risk with a balanced portfolio.