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Is it too late to buy this FTSE 100 stock, up 76% in 2023 so far?

British flag, Big Ben, Houses of Parliament and British flag composition

A 76% return for a FTSE 100 stock in just eight months or so sounds fanciful. But that’s exactly what’s happened for investors in global aerospace firm Melrose Industries (LSE: MRO).

Today, I’m looking at what’s behind this positive momentum and whether it can continue.

Why has this FTSE 100 stock soared?

Melrose’s outperformance might not come as a surprise when one reviews the company’s announcements.

Having posted a jump in profit last year (£384m compared to £194m in 2021), Melrose predicted double-digit revenue growth in 2023. This was due, in part, to post-pandemic demand from the civil aviation sector.

Interestingly, one of the firm’s major clients — fellow top-tier member Rolls-Royce — has been one of the best-performing stocks in the FTSE 100 in 2023. No wonder investors were keen to embrace Melrose’s decision this spring to spin off its automotive arm and become a pureplay aerospace business.

Based on a more recent update, things appear to be going to plan.

In May, the company said that it was trading “ahead of expectations“. Revenue rose 19% in the first four months of 2023. “Significant growth” in profit and margin was also posted.

Given how many listed companies are suffering as a result of multiple economic headwinds, such bullish talk was always likely to go down well with the market.

Positive momentum

I’m probably not alone among Fools in saying that I’ve completely ignored the jet parts supplier to date. That won’t be the case going forward.

The FTSE 100 index within which Melrose features has fallen almost 3% in 2023. So, Melrose hasn’t just beaten the market, it’s absolutely pummelled it.

Based purely on what the company is saying, I wouldn’t be surprised if this momentum continued.

Full-year revenue of between £3.35bn and £3.45bn has already been predicted. The company is also expecting “substantial further growth in future years“.

Baked in?

Notwithstanding this, there are a few things that give me pause for thought.

The valuation — a price-to-earnings (P/E) of 33 — looks steep. To be fair, this drops to 21 in 2024 if analyst projections prove correct. Problematically, earnings estimates often need to be revised, sometimes downwards.

Recent director selling is another potential red flag. CEO Simon Peckham offloaded 2 million shares in June due to a “change in personal circumstances“. Fair enough. However, signs that this was becoming a trend among senior management would be worrying.

Realistically, Melrose could also be subject to a simple bout of profit-taking. As a Fool, I’m focused on buying quality stocks and holding them for years. But I certainly wouldn’t blame anyone for taking some money off the table after such a run.

On the watchlist

For me, there are two takeaways from Melrose’s stellar showing in 2023 so far.

First, we have yet more evidence that it’s possible to smash the market if — and here’s the catch — we’re able to buy the right shares at the right time.

Second, it’s also proof that those companies that don’t hog the headlines as much as some FTSE 100 stocks are actually capable of generating far better returns. I’m looking at you BT and Lloyds Bank!

I’ll need to do more digging on Melrose before I consider adding the shares to my own portfolio.

But it goes on my watchlist for now.

The post Is it too late to buy this FTSE 100 stock, up 76% in 2023 so far? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc and Melrose Industries Plc. 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.