My top growth stock for May is flying, but I think it’s just getting started!

This firm’s business is tilting towards higher-margin growth areas. However the stock’s valuation still looks modest, to me.

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In an article published on 2 May, I named Bodycote (LSE: BOY) as my top growth stock pick for May.

Since then, the industrial services provider has been shooting up. The share price chart shows the stock has risen by around 10% and now changes hands in the ballpark of 767p (20 May).

However, for investors working on a time horizon longer than a mere two or three weeks, I reckon there may be much more business progress to come.

Recovery and growth

My hope is the share price will reflect strong operational gains in the coming months and years to drive a decent investment return for shareholders.

One of the main reasons for my optimism about Bodycote’s prospects is that I’m bullish about the outlook for economies around the world and the UK’s in particularly.

Bodycote looks well placed to benefit from resurgent industry around the world as economies recover. The firm provides thermal processing and heat treatment services for the energy, automotive, defence, aerospace and industrial sectors.

However, the need for recovery follows a decline, and such cyclicality is one of the biggest long-term risks for Bodycote shareholders.

Scoping back on the chart, it’s clear the stock has moved essentially sideways over 10 years. That’s a frustrating outcome for long-term investors. However, past performance is not a reliable guide to the future.

Some businesses with cyclically sensitive operations have staged impressive growth in operations over many years. One example among many is building services products distributor Ferguson.

Meanwhile, Bodycote has a modest net debt position on the balance sheet, suggesting the business is well-financed for its next growth phase. On top of that, the dividend record is impressive, with annual increases every year since at least 2018 – even through the pandemic.

The cash flow record looks robust, and City analysts expect normalised earnings to increase by almost 18% this year and by 14% in 2025.

Targeting higher-growth sectors

Bodycote looks like a survivor and a winner as we emerge from a troubled few years for the economy. Part of the reason for the robust earnings forecasts is that cost pressures have been easing for the business.

However, that’s not the whole story. The directors also have a plan for growth and they’re working it hard.

Already, more than 60% of the firm’s headline operating profit comes from the higher-growth areas of specialist technologies, emerging markets and civil aerospace.

The directors reckon those sectors provide higher-margin growth opportunities. Looking ahead, they expect the firm’s business to flourish within those categories and to “continue” to outperform the company’s “classical” heat treatments operations.

Meanwhile, the forward-looking earnings multiple for 2025 is just below 14 and the anticipated dividend yield is about 3.4%. That looks like a fair valuation, to me.

There are no guaranties of a positive investment outcome here, as with any business or stock. Nevertheless, I reckon Bodycote looks like one to tuck away and forget. Wake me up in five years’ time and let’s see how it’s doing then!

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 assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Bodycote Plc. 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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