In the deluge of company results published today, two reports stand out to me as being some of the worst.
Bodycote (LSE: BOY) and Exova Group (LSE: EXO) have both published numbers today that look good on the outside, but seem less than attractive to me personally when you dig below the surface.
Positive reaction
The market has reacted positively to Bodycote’s numbers, sending the shares up by 8% in early trading. The company reported statutory profit before tax of £92m for the year ended 31 December 2016 compared to £75m for the previous year. However, last year the company booked a large one-off restructuring charge of £20m, which depressed the statutory figures. Excluding this charge, pre-tax profit for 2015 would have been £99.2m. Using the same adjusted figures, pre-tax profit for 2016 came in at £97m. So, on an adjusted basis Bodycote’s profit fell 2.2% for the year.
What’s more, while headline revenue expanded 5.9% year-on-year, Bodycote’s return on sales and return on capital employed fell to 16.6% from 18% and to 17.7% from 19% respectively. It seems the restructuring of the business has done little to improve margins. The firm’s net cash balance declined from £12.3m to £1.1m, and headline earnings per share fell 6.3%.
Considering these figures, it seems strange to me that the market has reacted so positively to Bodycote’s full-year numbers. The shares are currently trading at a P/E of 19.1 based on today’s numbers, which seems too generous for the company’s sluggish growth. This year, City analysts have pencilled in earnings per share growth of 7% better than 2016’s earnings contraction but arguably still too little too late for the business.
A worrying trend
Like Bodycote, Exova’s positive headline figures are also hiding a worrying underlying trend. For the year ending 31 December 2016, Exova reported revenue growth of 10.8%, which includes a substantial benefit from sterling’s depreciation.
At constant currency, revenue grew 2.4%, but once again this figure has been influenced by additional factors namely bolt-on acquisitions. Stripping out the impact of acquisitions and disposals, organic revenue declined by 0.2%. And just like Bodycote, Exova has been able to inflate its figures thanks to a one-off restructuring charge booked last year.
The group’s statutory results show pre-tax profit growth of 57.8% from £36.6m to £23.2m year-on-year. If you take away these costs pre-tax profit grew by a more subdued 8% year-on-year that’s including the impact of currency. Considering the weak sterling boosted top-line revenue by 10.8%, it’s reasonable to assume that without this leg up, Exova’s pre-tax profit growth would have been negative.
Shares in Exova currently trade at a forward P/E of 16.6 based on City estimates for 2017 growth. For 2017 analysts are forecasting a decline in earnings per share of 3%. With this being the case, and considering the company’s poor results for 2016, I’m avoiding Exova for the time being.
