Investing in cheap stocks is a proven strategy for building wealth in the stock market. And it’s how investors like Warren Buffett became billionaires.
Yet even after the FTSE 100 delivered exceptional returns in 2025, there are still plenty of buying opportunities to take advantage of in 2026. And among these potential winners stands Melrose Industries (LSE:MRO).
Despite delivering exceptional performance last year and even surpassing its own targets, the aerospace enterprise remains priced far below its peers. And the latest institutional forecasts suggest that, even after more than doubling since September 2022, the shares could be up to 54% undervalued right now!
Hidden growth potential
Melrose has spent the last few years transitioning from an industrial turnaround specialist into a pure-play aerospace components manufacturer.
This evolution introduced a lot of complexities into the firm’s financial statements. But last year, the transition was completed. And what’s emerged is a highly profitable, free cash flow-generating machine, on track to deliver even more revenue, earnings, margin, and free cash flow growth between now and 2029.
| Key Performance Indicator | 2025 | 2029 Target |
| Revenue | £3.6bn | £5bn |
| Adjusted Operating Profit | £647m | £1.2bn |
| Free Cash Flow | £125m | £600m |
Even in 2025, Melrose has already achieved staggering results. Its flagship Engines segment has bolstered operating margins to 31.9% – one of the highest in Europe.
Yet with aftermarket service demand rising rapidly, alongside accelerated build rate targets from aircraft manufacturers such as Airbus and Boeing, even more margin expansion is expected. And these tailwinds are only being amplified by the new defence spending supercycle across Europe.
As such, the latest projections from institutional analysts indicate that Melrose shares could climb as high as 830p over the next 12 months. That’s 54% higher than where the stock trades today – enough to transform £10,000 into £15,400.
But if that’s the case, why’s the stock so cheap?
Where’s the risk?
As previously mentioned, Melrose’s financials are complicated. And one item that has some investors on edge is something called ‘variable consideration’ (VC).
In over-simplified terms, this essentially represents revenue that Melrose has already recognised on its income statement, but hasn’t actually received in cash yet.
The VC comes from the group’s complex long-term engine partnership agreements. The problem is, while this cash flow is expected to eventually materialise, it opens the door to potential future impairment charges if an engine project is cancelled, delayed, or renegotiated. And it’s this uncertainty that’s primarily keeping Melrose in cheap stock territory.
So where does that leave investors?
The verdict
VC’s definitely something investors need to watch carefully. However, as engine projects mature, this part of the revenue stream’s expected to shrink over time as the gap between reported revenues and cash flow closes.
As this happens, the uncertainty surrounding Melrose is organically lifted, enabling a steady multi-year bull run in the process. That obviously isn’t guaranteed, especially if the concerns surrounding VC prove justified.
But with Melrose shares trading at a significant discounted price, that’s a risk I’m taking. And this isn’t the only cheap stock in the FTSE 100 that I’ve got my eye on right now…
