Investment Column: Bodycote tarnished by auto industry links

Bodycote

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.

Cranswick

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.

Devro

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.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Buttoned up: Ryan Reynolds with Helen Mirren in ‘Woman in Gold’
filmFor every box-office smash in his Hollywood career, there's always been a misconceived let-down. Now he says it's time for a reboot
News
people
News
Actress Julianne Moore wins the Best Actress in a Leading Role Award for 'Still Alice' during the 87th Annual Academy Awards in Hollywood, California
people
Sport
Ross Barkley
footballPaul Scholes says it's time for the Everton playmaker to step up and seize the England No 10 shirt
News
'We will fix it': mice in the 1970s children’s programme Bagpuss
science
Life and Style
2 Karl Lagerfeld and Choupette
fashion
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Graduate Recruitment Resourcer

£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

Recruitment Genius: Telesales Executive - OTE £32,000+

£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Day In a Page

War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

War with Isis

Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
Scientists develop mechanical spring-loaded leg brace to improve walking

A spring in your step?

Scientists develop mechanical leg brace to help take a load off
Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

Peter Ackroyd on Alfred Hitchcock

Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

Ryan Reynolds branches out in Woman in Gold

For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
Why Robin Williams safeguarded himself against a morbid trend in advertising

Stars safeguard against morbid advertising

As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

UK horticulture industry facing skills crisis

Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
Hack Circus aims to turn the rule-abiding approach of TED talks on its head

Hack Circus: Technology, art and learning

Hack Circus aims to turn the rule-abiding approach of TED talks on its head. Rhodri Marsden meets mistress of ceremonies Leila Johnston
Sevenoaks is split over much-delayed decision on controversial grammar school annexe

Sevenoaks split over grammar school annexe

If Weald of Kent Grammar School is given the go-ahead for an annexe in leafy Sevenoaks, it will be the first selective state school to open in 50 years
10 best compact cameras

A look through the lens: 10 best compact cameras

If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
Paul Scholes column: Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now

Paul Scholes column

Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now
Why Michael Carrick is still proving an enigma for England

Why Carrick is still proving an enigma for England

Manchester United's talented midfielder has played international football for almost 14 years yet, frustratingly, has won only 32 caps, says Sam Wallace
Tracey Neville: The netball coach who is just as busy as her brothers, Gary and Phil

Tracey Neville is just as busy as her brothers, Gary and Phil

The former player on how she is finding time to coach both Manchester Thunder in the Superleague and England in this year's World Cup
General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?