Shares of the UK-based Melrose Industries PLC (GB:MRO) plunged sharply after analyst Ian Douglas from UBS double-downgraded his rating from Buy to Sell on the stock. Douglas also reduced the price target from 770p to 400p, suggesting a downside of almost 16%. Following the downgrade, Melrose stock declined more than 9% as of writing, placing it among Friday’s biggest losers on the FTSE 100 index.
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As a result, rival companies BAE Systems (GB:BA) and Rolls-Royce Holdings (GB:RR) also fell, with losses of 0.42% and 0.052%, respectively.
Melrose is a manufacturing company in the aerospace sector. It operates through two divisions – Engines and Structures.
Why Did UBS Downgrade Melrose’s Rating?
Douglas downgraded Melrose stock, as he thinks that the revenue and risk-sharing partnership (RRSP) portfolio, which is the company’s largest revenue source, is significantly overvalued.
Earlier this month, the company released its 2024 interim results, showcasing strong performance in RRSP. The company stated that profit and cash flow from RRSPs are increasing as engines enter a profitable aftermarket phase. The company expects solid cash generation, including RRSP aftermarket inflows, with an NPV (net present value) of £5.7 billion.
However, UBS values the portfolio at £2.8 billion, leading to the downgrade. UBS stated that its estimate is half of management’s expectations due to differences in cash-flow projections, discount-rate assumptions, and timing effects.
TipRanks Offers Analyst Rankings
According to the TipRanks’ ranking, Douglas is a five-star-rated analyst. He ranks 496 out of more than 9,000 analysts on TipRanks. He has a success rate of 69% and has delivered an average return of 23.4% per rating.
Through its ranking tool, TipRanks monitors the performance of various financial experts, ranking them based on their success rate, average returns, and statistical significance. This tool could help users find and monitor top financial experts and assess their performance on specific stocks.
Are Melrose Shares a Good Buy?
According to TipRanks consensus, MRO stock has received a Strong Buy rating based on all Buy recommendations from four analysts. The Melrose share price target is 686.25p, which implies an upside potential of 47%.
