Home to some of the UK’s most important businesses, the FTSE100 has seen a lot of activity in recent months, particularly in the aerospace and defense sector.

However, a recent decision by Melrose Industries (LSE: MRO) surprised me. After slowly sliding 30% over the past six months, the stock suddenly jumped 10% earlier this week.

So what has changed?

Monday (October 28), Melrose has released a document detailing the key elements of its Risk and Income Sharing (RRSP) partnerships.

These RRSPs are essentially joint ventures that it holds with engine manufacturers, in which Melrose co-invests in the development of specific aircraft engine programs. Instead of just supplying parts, it also shares in the revenue generated by these engines over their lifespan, which can extend over many years.

This structure has allowed it to maintain a strong cash-generating position with projected cash flow growth through 2050.

“RRSPs are an important and necessary part of the aerospace engine industry, with contract lifespans of approximately 50 years.“, he said.

Currently, it holds a diversified portfolio of 19 RRSPs, with 17 of these projects already cash flow positive and two more expected to become profitable by 2028. These partnerships allow Melrose to benefit from strong after-sales revenue streams. margin as planes age and need revenue. maintenance and replacements.

The portfolio is expected to generate a total cash flow of £22 billion over the next two and a half decades.

This is not a small number! So should I invest in stocks?

A (Mel)rose by any other name

Aerospace and defense may be booming industries, but I already own similar stocks in BAE Systems. As this is not a central objective of my investment strategy, I would need a good reason to expose myself more.

First of all, what are the risks? RRSPs sound great, but they require a significant initial investment and long-term financial commitments. They also depend on the success of specific engine programs, so technological or regulatory changes could reduce projected cash flows.

Additionally, the commercial aerospace sector’s recovery remains gradual, which could affect revenues in the near term. Faced with increasing pressure to adopt sustainable technologies, Melrose could find itself spending more than expected.

Financial outlook

Melrose is currently unprofitable but has good price upon reservation (P/B) of 1.9, well below the industry average. Its debt stands at £1.17 billion, but its debt-to-equity ratio has fallen from 50% to 38%.

While investing in RRSPs is expected to pay off, analysts predict that profits will grow at a rate of 106% per year in the future. This means the company will likely become profitable next year.

The average 12-month price target from 12 analysts is 650p, which represents an increase of 46.7% from the current level. Analysts who study BAE only expect an increase of 16% over the next 12 months.

So, after looking at the numbers, Melrose might be a better short-term opportunity. But it remains to be seen whether his play on RRSPs will bear fruit in the long term.

Overall, I think Melrose could be an interesting consideration for investors looking to get into the aerospace and defense industry. However, with the US elections approaching in an already unstable geopolitical landscape, I’m sticking to what I know and holding on to my BAE shares for now.