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Berenberg highlighted Bodycote’s (LSE:BOY) financial strategy, which aims for 20% operating margins in the medium term. The firm is noted for its minimal investment needs and strong potential for self-driven improvements. The focus on an industrial cyclical recovery and robust cash generation is seen as undervalued compared to others in the industrial engineering sector.
Berenberg described Bodycote as an early-cycle, operationally geared play in the industrial recovery space. Despite current weak industrial indicators and low visibility, the firm's potential exposure to recovery is considered high relative to other companies covered by Berenberg.
Looking ahead over the next 12 months, with comparisons easing and the likelihood of stabilization in industrial markets, there is a potential for accelerated earnings. Berenberg's earnings per share forecasts for 2025 are slightly above the consensus estimates.
The bank also emphasized Bodycote’s significant exposure to the aerospace and defense sectors, which is expected to drive growth in the medium term. Historically, Bodycote has maintained a strong balance sheet, characterized by low investment requirements and solid cash generation. This financial stability provides room for further mergers and acquisitions as well as enhanced shareholder returns, alongside the ongoing £60 million share buyback program.
Berenberg also noted the stock’s attractive valuation. Bodycote is currently trading at 12.7 times the forecasted 2024 earnings and 10.1 times the forecasted 2024 enterprise value to earnings before interest and tax. These multiples represent considerable discounts compared to Bodycote’s historical averages and the sector’s historical averages of 15% and 16%, respectively.
The report indicates that the stock is trading at notably low levels compared to its sector, suggesting that current pricing may already reflect significant cyclical challenges while not fully accounting for the company's self-help initiatives.
