Bodycote Shares Drop After RBC Lowers Rating Due to Valuation Concerns

Overview#

Bodycote, a British company specializing in heat treatment, saw its shares decline by more than 2% on Thursday. This drop followed a downgrade from RBC Capital Markets, which expressed concerns about the company's stock valuation returning to its 10-year average after a recent surge.

RBC's Rating Change#

RBC analyst Mark Fielding reduced his rating for Bodycote from "outperform" to "sector perform." Despite this change, he maintained his price target at 775p, suggesting only a slight upside of about 1% from Wednesday's closing price of 764p. The forward price-to-earnings ratio, which measures a company's current share price relative to its expected earnings, stands at 15.4 times for 2026 estimates, aligning with its historical average.

Earnings and Revenue Forecasts#

Fielding has adjusted his earnings-per-share estimate for 2026 down by 2% to 49.74p, slightly below the consensus. He also revised his revenue forecast to £712.2 million, down from £715.4 million. The growth outlook appears uneven, with the aerospace and defense sectors expected to see moderate growth, while automotive and industrial segments face challenges.

Future Projections and Cost Savings#

Bodycote aims to achieve a 20% EBITA (Earnings Before Interest, Taxes, and Amortization) margin by 2028, an increase from 15.7% in 2025. The company anticipates annual savings of at least £15 million from consolidating sites by mid-2027, with incremental savings expected in the following years. RBC predicts that EBITA will rise from £124.2 million in 2026 to £150.5 million by 2028.

Cash Flow and Market Scenarios#

Currently, Bodycote's free cash flow yield is at 4%, which is less attractive compared to the 8%-9% range that led to an upgrade in October 2024. RBC has outlined two scenarios: an upside scenario of 975p, assuming a quicker recovery in end markets, and a downside scenario of 390p, which would reflect a significant drop in earnings. Bodycote's focus on high-growth markets is expected to increase from 35% of sales in fiscal 2023 to over 50% by 2028.