Bodycote's Earnings Decline: Why Shareholders Are Still Smiling

In the world of investing, it's not uncommon to see a disconnect between a company's earnings performance and its share price. Bodycote PLC (LON:BOY) is a prime example of this phenomenon. Over the past five years, Bodycote has seen a decline in earnings, yet its shareholders have enjoyed a 48% increase in value. How is this possible? Let's dive into the numbers and the strategic initiatives that have kept investors optimistic despite the earnings slump.



The Earnings Decline

Bodycote's earnings have been on a downward trajectory for the past five years. The company's Return on Equity (ROE) stands at a modest 8.5%, significantly lower than the industry average of 14%. This low ROE indicates that Bodycote is not effectively generating profits from its shareholders' investments. Additionally, the company has a high payout ratio, retaining only 41% of its income. This high payout ratio has resulted in lower earnings growth, with a very low income growth of 4.1% over the past five years. This is further validated by the fact that Bodycote's net income growth is lower than the industry average growth of 9.3% in the same period.

The Share Price Surge

Despite the decline in earnings, Bodycote's shareholders have seen a 48% increase in value over the same period. This discrepancy can be attributed to several underlying factors. Firstly, the company's adjusted operating margin improved to 17.9% in 2024 from 16.7% in 2023, making progress towards Bodycote's target of more than 20% by 2028. This improvement in margin indicates that the company is becoming more efficient and profitable on a per-unit basis, which can drive shareholder value.

Secondly, Bodycote's 'optimisation' programme is expected to deliver additional profit benefits in the second half of 2025, with a GBP12 million to GBP14 million profit benefit at full run-rate seen by end-2026. This programme includes plant closures and cost control actions, which are aimed at improving the company's financial performance.

Thirdly, Bodycote's dividend payout has increased, with the final dividend upped by 0.6% to 16.1 pence per share from 16.0p, and the total dividend increased 1.3% to 23.0p from 22.7p. This increase in dividend payout can attract income-seeking investors and drive up the share price.

Lastly, Bodycote's return on equity (ROE) is expected to rise to 13% over the next three years, which can indicate that the company is becoming more efficient at generating profits from its shareholders' investments. This expected increase in ROE can drive up the share price as investors anticipate higher future earnings.

Strategic Initiatives

Bodycote's strategic plan, which includes the 'Optimise', 'Perform', and 'Grow' initiatives, has been implemented to address the challenges in its end markets. The company has taken decisive actions under each of these initiatives to enhance its operational performance and accelerate growth.

1. Optimise: This initiative focuses on enhancing the quality of the business by optimizing the plant footprint. Bodycote has commenced with the first plant closures as part of this program. The company expects to see a profit benefit of £12 million to £14 million at full run-rate by the end of 2026. This initiative is aimed at improving efficiency and reducing costs, which is crucial given the challenging conditions in the Automotive and Industrial markets.

2. Perform: The 'Perform' initiative involves the HEAT program, which is designed to improve operational performance. This program has been rolled out to pilot sites, and early progress has been delivered on this strategic plan. The HEAT program is expected to enhance the company's operational efficiency and drive better performance metrics.

3. Grow: Under the 'Grow' initiative, Bodycote has identified attractive investment options in high-margin areas. The company has a framework in place to proceed with initial growth investments aligned to its target areas. This initiative is aimed at accelerating growth and capitalizing on opportunities in the market.

Early benefits from these actions include a significant improvement in the adjusted operating margin, which progressed towards the target of more than 20% by 2028. The adjusted operating margin improved to 17.9% in 2024 from 16.7% in 2023. Additionally, the company has seen stable organic revenue performance, excluding surcharges, in a challenging market environment. Organic revenue grew by 1.0% in 2024.

Conclusion

Bodycote's earnings decline over the past five years is a cause for concern, but the company's strategic initiatives and improving financial metrics have kept shareholders optimistic. The 'Optimise', 'Perform', and 'Grow' initiatives are aimed at enhancing operational efficiency, improving profitability, and accelerating growth. As these initiatives bear fruit, Bodycote's share price is likely to continue its upward trajectory, despite the earnings slump. Investors should keep a close eye on the company's progress and the impact of its strategic initiatives on its financial performance.