Bodycote boom time raises the fear of inevitable bust
Heating engineer’s share price hits record highs, but for how long?
An operationally geared business model and limited visibility on future work could leave
Bodycote (BOY) short of expectations if a cyclical downturn emerges.
Forecasts for the heating and thermal systems engineer have been upgraded at least twice this calendar year thanks to a robust end market demand.
This led to the company announcing a 25p per share special dividend alongside forecast-busting 2017 results. Bodycote raised 2018 full year guidance again at the end of May.
That has encouraged investors to chase the share price to all-time highs of £10.17, putting the stock’s price-to-earnings multiple at 20.4,
nearly a double-digit premium to sector peers.
While there is presently little hint that work is drying up – quite the opposite – Bodycote management admit that the business ‘has limited forward visibility.’ This suggests there will be little warning if a fall in demand does slam the brakes on new contracts.
Operational gearing is when a business has predominantly fixed costs. This is a double edged sword that makes unexpected business wins more profitable when demand for products or services are high. Equally, it is harder to lower operating expenses when times get tougher, magnifying the negative effects on profitability. (SF)