Investment Column: Bodycote tarnished by auto industry links

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The Independent Online


Our view: Sell

Share price: 96p (-27p)

Kicking a company when it is down is best avoided, but for buyers it is pretty tough to find anything nice to say about the engineering group Bodycote.

The shares were down 22 per cent yesterday as the company, a supplier of thermal processing services, announced a profits warning. The finance director, David Landless, added that it was "anybody's guess" how 2009 would pan out.

About 20 per cent of Bodycote's work comes from the toxic automotive industry, in Europe and the US. While the company may get disproportionately punished by the market for this part of the business, existing investors will take no solace from the fact that the shares were already down by more than 50 per cent in the last 12 months, before yesterday's update.

Yes, the stock is now cheap, but the indication from analysts is that this does not mean it will get catapulted upwards on signs of a recovery. Yesterday, watchers at Dresdner Kleinwort cut their recommendation from buy to sell.

It is not true, however, that the company is a lost cause. The group has sold off its testing business, and while investors will be miffed that the cash handout from the proceeds has been halved, Bodycote will have a strong balance sheet heading into a downturn.

Analysts at Singer argue that on a price earnings ratio of 9 times and enterprise value to Ebitda of 2.5 times, Bodycote shares are fair value. The group is cash generative and has a minimal pension deficit, they say, "but the sector is going through the downgrade phase so it will take a while for this value to emerge". The group's inherent value indeed may yet emerge, but it could well be after a long period of pain for investors. Sell.


Our view: Buy

Share price: 580p (-20p)

In these times of seemingly ceaseless bad news on the economy, we are all having to trim back on life's luxuries.

The food producers may try to argue that their industry is insulated from the worst of the financial mire as after all we still have to eat. This is partly true: we do all have to eat, but we are much more likely to buy cheaper foods, which is probably why the pork producer Cranswick was yesterday able to report a record dividend, turnover and profits when it issued its interim numbers.

Pork, selling at an average of £11 per kilo, is cheap versus beef and lamb, making it an attractive proposition for those worried about their jobs. It also makes Cranswick's shares an attractive proposition for investors looking for somewhere safe for their money, especially as most experts agree that the worst of a phase of spiralling raw material costs is over.

Cranswick's shares are in the unusual position of having grown in value in the last three months. Sadly, this does make the stock expensive, with watchers at Citigroup pointing out that, trading on a 2009 price earnings ratio of 8.9 times, the group comes at a 25 per cent premium to the UK's mid-cap food producers. This should be enough to put the glory-hunters off, but for those looking for safety, Cranswick has to be a compelling option. Its chairman, Martin Davey, argues that the premium is justified as he expects many of his rivals to be issuing profits warnings when they update the market. He expects a continuation of the company's 16 per cent annual compound growth of the last 10 years.

Cranswick shares are pricey, but most investors are looking for those companies that should be able to weather the looming recession. Buy.


Our view: Hold for now

Share price: 77p (+0.5p)

It would appear that the sausage industry is the place to be for investors looking to beat the credit crunch. As well as Cranswick's impressive numbers, Devro, the group that makes collagen products for the food industry, including sausage skins, updated the market yesterday, saying that it was on target and that its full-year profits will hit expectations.

The group added that greater demand for pork products in emerging markets, along with the soaring price of gut, which is used as an alternative to collagen, means that demand is booming. One of the biggest risks, according to the finance director, Peter Williams, is capacity, which Devro expects to increase by between 5 and 10 per cent each year.

Investors looking for a small to mid-cap growth stock should like the look of Devro, except that according to the house broker, Investec, much of that growth has already occurred. The experts increased the company's target share price to 85p yesterday, and while that indicates that the group should be a safe bet, it also suggests that there is not much juice left in the stock price, despite the shares closing up in trading. Hold for now.