Thermal processing services provider Bodycote(LSE: BOY) has released a somewhat mixed trading update today. On the face of it, sales growth of 12.7% in the four months to 31 October is extremely positive. However, it's far less so when the impact of weak sterling is excluded. So could Bodycote be a stock to buy or sell right now?
Bodycote's sales when the effects of a falling pound are excluded were somewhat disappointing. They fell by 3.1% even though they were up against weak comparables from the same period of the previous year. For example, Aerospace revenue grew 2.5% on a constant currency basis, with higher levels of growth in Europe partly offset by weaker revenues in the US. Car and light truck revenues increased by 3.8% as the firm continued to benefit from its investment in new capacity, especially in North America.
However, there was also significant disappointment, with its Oil & Gas sector recording a near-halving of revenue compared to the same period of last year. And its Heavy Truck revenues declined by 14.9%, with both divisions likely to see their sales come under additional pressure due to operating conditions that are highly uncertain.
For example, in the oil and gas sector there's the potential for price falls unless supply can be brought under control. That's because demand growth is likely to remain sluggish throughout much of 2017. Similarly, Bodycote's Heavy Truck ops are likely to be hit by the continuation of a trend that has seen a wide range of industrial sectors hit by ongoing weakness in the last 18 months.
Due to its weak trading period and uncertain outlook, Bodycote's earnings prospects are somewhat downbeat. Although it's on track to meet full-year guidance, the bottom line is due to fall by 7% in the current year. Even though it's expected to recover next year to post a rise in earnings of 7%, its price-to-earnings (P/E) ratio of 16 lacks appeal. It doesn't appear to offer a sufficiently wide margin of safety to merit investment - even if sterling continues to weaken and its reported performance gains a further boost.
Also lacking appeal within the industrials sector is industrial engineering specialist IMI(LSE: IMI). It trades on a P/E ratio of 16.7 and yet is expected to record a fall in earnings of 10% in the current year. As with Bodycote, this is set to be followed by a return to growth next year. But IMI's earnings growth forecast of 6% for 2017 seems inadequate to justify its current valuation. Either its outlook would need to improve, or its share price would be required to fall considerably before it becomes a worthwhile purchase for long-term investors.
As such, neither Bodycote nor IMI seem to be worth buying at the present time. Their risks remain high, while the potential rewards on offer are limited due to their high valuations.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Bodycote and IMI. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.