Why I’d consider buying this FTSE 250 growth stock alongside this battered mid-cap

Shares in this mid-cap are flying after revealing it was likely to beat analyst expectations on profit.

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Stock in thermal processing services provider Bodycote (LSE: BOY) rose a very healthy 8% in trading this morning as investors lapped up the latest trading update from the FTSE 250 constituent.

With the company’s share price hitting record highs, should investors pile in and ride the momentum?

Expectations-beating

At £234m, group revenue was 7% higher (or 10% at constant currency) year-on-year over the four months to the end of April. 

Broken down, revenues at its Aerospace, Defence and Energy (ADE) division climbed 5% to £94m.  Although income connected to civil aerospace was impacted by lower demand in France, overall growth of energy revenues hit 24% over the reporting period (thanks to a strong performance in North America). 

Elsewhere, Bodycote’s other arm — Automotive and General Industrial (AGI) — saw a 9% increase to £149m with car and light truck revenues rising 8%, partly thanks to “strong growth in Emerging Markets“.

Pleasingly, the £1.8bn cap’s balance sheet continues to look robust with a net cash position of £45m at the end of the reporting period — £5m higher than at the end of the last calendar year. While its growth credentials mean that it’s unlikely to be a priority investment for income seekers, confirmation that management had approved a 25p per share special dividend in addition to the final payout of 12.1p per share will no doubt be welcomed by its owners. 

Looking ahead, Bodycote believes full-year revenue will now come in higher than expected and that operating profit will slightly exceed analyst predictions.

At 18 times earnings before today, however, its stock was already looking pricey relative to industry peers. So, while today’s positive numbers suggest that investors should expect to pay a premium, I’d be tempted to wait for a likely period of profit-taking to subside before moving in. 

Is the recovery on?

Another riser today was banknote designer and manufacturer De La Rue (LSE: DLAR) — a company which made headlines earlier in the year after losing the tender to produce the new, post-Brexit blue passports to Franco-Dutch competitor Gemalto.

Having grown accustomed to profit warnings, investors appeared relieved with the mid-cap’s latest set of full-year numbers.

In the 12 months to the end of March, group revenue rose 7% to slightly below £494m. As expected, adjusted operating profit fell (by 11% to £62.8m), although this rose 7% when its now-sold paper business is excluded from calculations. 

De La Rue’s goal to evolve into “a less capital-intensive, more technology-led business” appears to be going well with CEO Martin Sutherland stating that its non-printing divisions — focusing on areas such as security, product authentication and traceability — now contribute more than a third of total revenue and over 50% of operating profit. 

News that net debt had reduced by £71m to just under £50m was also cheered. It was the lowest for five years and was thanks to the Basingstoke-based business receiving £60.3m cash from the aforementioned sale. 

With the full-year dividend unchanged at 25p, the 12-month order book 6% up (to £363m) on the previous year, new strategic partnerships, and increased R&D investment, I wouldn’t be surprised if value hunters and contrarians were to begin reassessing the company.

At 12 times forecast earnings for the new financial year and continuing to register excellent returns on the capital it employs, today might just mark the beginning of a sustained recovery for De La Rue. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Bodycote. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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