I’d avoid the Rolls-Royce share price and buy this FTSE 100 stock instead

Paper fortune teller investment opportunities

The Rolls-Royce (LSE: RR) share price has been one of the big losers of the pandemic. However, as the economy has reopened, some investors have been buying the FTSE 100 company as a recovery play. 

I’ve also considered buying the stock as a recovery play, albeit a speculative recovery play. As one of the world’s largest manufacturers of engines for the civil aviation industry, the company is well-placed to benefit from the recovering aviation market. That’s the theory anyway.

In practice, there’s a lot that could go wrong. Even if passengers return to the skies in large numbers, the company may still struggle to remain consistently profitable. This would undoubtedly be bad news for the Rolls-Royce share price. 

This is why it’s incredibly challenging to value the stock. Despite the group’s reputation and scale, it’s consistently struggled over the past few decades to live up to its potential. It might be different this time around, although there’s no guarantee. 

With this being the case, I’ve been looking for other companies in the industrial sector that might be a better buy than Rolls. 

An alternative to the Rolls-Royce share price

According to the latest information, sectors seeing the fastest growth as the economy reopens are construction and manufacturing.

I think that suggests equities in the industrial and construction sectors could be the best investments for me to own right now. As such, while I’d avoid the Rolls-Royce share price, I would buy shares in FTSE 100 peer Melrose (LSE: MRO) as an alternative. 

These two companies couldn’t be more different. As Rolls has lurched from one disaster to another, Melrose has achieved a strong track record of buying struggling industrial companies, turning them around, and selling them for a profit. 

The company’s latest is the £2.6bn disposal of its Nortek Air Management Division. After this sale, the enterprise will be returning £730m to shareholders.

Following this special dividend, the company will have paid out £5bn to shareholders since its listing in 2003. At the time of the listing, the business was valued at just £10m. It is worth more than £7bn today. 

As Melrose has created value, the Rolls-Royce share price has destroyed it. Shares in the FTSE 100 company have fallen 78% since reaching an all-time high of 437p at the end of 2013. 

FTSE 100 investment

I’m well aware that industrial companies can be volatile. Melrose has been successful, but past performance should never be used as a guide to future potential. The company could face challenges from higher interest rates and rising costs as we advance. 

However, what excites me is the company’s management, which has a tremendous amount of experience buying, turning around and selling businesses. Is in my opinion, Melrose’s management is its best asset. 

That’s why I’d buy Melrose over Rolls today. Even though Rolls may see a recovery in the weeks and months ahead, I’d rather have exposure to Melrose’s management, which seems to be one of the best in the business. 

The post I’d avoid the Rolls-Royce share price and buy this FTSE 100 stock instead appeared first on The Motley Fool UK.

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More reading

  • Can the Rolls-Royce share price hold out until the end of 2021?
  • 5 reasons to buy Rolls-Royce shares – and why I’m not
  • Are these 2 FTSE 100 travel stocks a bargain?
  • Would I buy Rolls-Royce shares at 8-month lows?
  • The Rolls Royce share price is below 100p – so is it a buy?

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Melrose. 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.