FTSE 100 Investing: 2 Bargain Buys to Consider Today

Last Updated July 28th 2021

4 Min Read

Right now the FTSE 100 companies are gaining renewed attention from international investors. The index of the 100 largest UK companies doesn’t always get as much attention as the Nasdaq or the S&P 500, but it is packed out with stocks every investor should consider adding to their portfolio. Here we take you through two FTSE 100 shares which look great value at the moment and explain why they could be worth adding to your portfolio.

FTSE 100 Investing: 2 Bargain Buys to Consider Today

Melrose Industries
Rolls Royce

1. Melrose Industries

Certainly not a household name, Melrose Industries is actually a fascinating jewel hidden away in the FTSE 100! Melrose are a buy-out specialist operating in the engineering sector. This means they swoop in a buy struggling companies with the goal of turning them around. They then either maintain ownership of the now restructured and successful company or they look to find a buyer to sell to.

The key point is that whilst corporate turn-around companies and private equity asset strippers are everywhere by now, Melrose are something more interesting than this. As an engineering firm themselves, they have the genuine industry know-how to help fix the broken business models of the companies they buy.

Their success stories include the 262-year-old Welsh automotive and aerospace engineering firm GKN, which Melrose bought in 2018, and energy technology company FKI, purchased in 2008.

These are just a few of the successful companies Melrose has built from the wreckage of failures. This is why they have been able to commit to returning over £730 million to shareholders this year. The Melrose has just finalized the details of their sale of Nortek Air Management to Chicago-based Madison Industries for a reported £2.62billion.

Importantly Melrose paid $2.8 billion when they initially acquired Nortek, and have since received just over $1 billion in cash from running the business. That effectively means the sale price just announced effectively doubles Melrose shareholders' investment.

This is a big part of why we think Melrose is a good bet – they have a great track record of doing what they do well. They have the ability to find companies that may be struggling right now, but which have the potential to succeed. Once Melrose have acquired ownership, they then generally set about cutting costs and making internal processes more efficient. This leaves the company more profitable than before, and in the case of Nortek, much more expensive!

Between 2017 and 2019, Melrose’s revenue climbed rapidly. However, the pandemic has of course had a negative impact here, and in 2020 it fell by 24% to just £8.77bn. This has deflated the share price and is part of why we think Melrose is a good business at a great price right now.

Melrose has achieved an average annual return on their investments of 21% since its first acquisition in 2005. This is a simply stunning set of results and shows Melrose have been able to develop a highly successful turnaround strategy for engineering firms. Some of the leading shareholder returns on original equity include 3.0 times for Dynacast, 2.6 times for FKI, and 2.3 times for Elster.

Melrose does of course face risks in the years ahead – several key engineering sectors like aerospace may yet take years to recover – but nonetheless, we think Melrose looks very attractive at its current relatively low price.

2. Rolls Royce

Following on from the engineering pick above, we now move on to one of the best-known aerospace and automotive brands in the world. Rolls Royce are one of the biggest aircraft engine manufacturers in the world. However, the last 18 months have been brutal for the whole industry, and the share price has barely moved after collapsing at the start of the pandemic. Are things about to turn around for Rolls Royce? Could now be the time to buy?

We think so, and for the following reasons. Rolls Royce, like many large firms, found during the pandemic that they could borrow much more than expected and at much lower than expected interest rates. To date so far, the company has raised over £7.3 billion in debt or new equity, without its interest rates moving noticeably. This is, of course, the luxury of being an old and respected brand known around the world.

However, it does now look like the end of the pandemic is in sight, and air travel volumes are final increasing again. As such, the worst looks to be behind Rolls Royce, and the share price still has a very long way to go to recover its pre-pandemic levels.

Summing Rolls Royce has several positive factors behind it right now. The future aerospace market looks more encouraging now than it did a few months ago, their debt burden looks high but manageable given the low rates, and they have a global brand that still symbolizes quality and trust in many people’s minds. Rolls Royce definitely looks like another good business at a great price right now.