While Rolls-Royce and GE Aerospace have soared to new highs and trade with substantial premiums to the market as a whole, Melrose Industries’ (LSE:MRO) share price has been stuck in the slow lane. Over the past two years, the FTSE 100 aerospace stock hasn’t delivered any share price growth. Its valuation has been languishing even as the business has quietly transformed into a much more attractive proposition.

A disconnected valuation

This disconnect between performance and valuation is the core reason I like this stock. Valuation metrics are always central to my investments.

It’s important to note that Melrose’s statutory earnings per share (EPS) is vastly different from its underlying diluted EPS. On a statutory basis the stock isn’t particularly cheap, but analysts typically focus on underlying data to provide a better picture of business health.

Statutory numbers are muddied by restructuring charges, disposals, and other one-off items that don’t reflect the ongoing business. The underlying diluted EPS, by contrast, strips out these distortions and accounts for all potential share dilution.

For 2025, analysts expect underlying diluted EPS to jump from 25.5p to 34p — a growth rate that puts most blue-chips to shame. And on an underlying diluted basis, Melrose trades at a forward price-to-earnings (P/E) ratio of around 15.1. That’s a long way below Rolls-Royce at 35 and GE at 44.

What’s more, the company’s price-to-earnings-to-growth (PEG) ratio’s exceptionally low. Management’s targeting over 20% compound annual growth in adjusted diluted EPS through 2029. In turn, this leads to a PEG ratio of around 0.75.

By contrast, Rolls and GE command PEGs above two. And this doesn’t mean I think they’re overvalued. These companies, like Melrose, have very strong economic moats and embedded positions within the global aerospace and defence markets. They deserve their premium valuations.

Melrose’s underappreciated moat

But here’s the thing, Melrose’s moat’s every bit as wide. This is a business with sole-source positions on 70% of its revenue, meaning it’s the only supplier for critical components on major aircraft engines and structures.

Through its GKN Aerospace division, Melrose holds established roles on 90% of active commercial and military engines worldwide, often with risk- and revenue-sharing agreements that lock in long-term, high-margin contracts.

Despite these strengths, an investment in Melrose isn’t without risk. The single biggest challenge has been supply chain disruption. This is a problem that’s plagued the entire aerospace sector.

Ongoing shortages and delays have forced Melrose to trim its 2025 revenue guidance, and bottlenecks at customers like Airbus and Boeing have limited production and deliveries. While Melrose’s aftermarket business and diversified portfolio have provided some cushion, these are challenges the business needs to overcome.

Yet even after accounting for these risks, the combination of a wide moat, strong growth, and undemanding valuation is unmatched in the FTSE 100. That’s my opinion anyway. It’s a stock I’ve added to my portfolio and it’s one I think deserves broader consideration.