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2 shares I’m avoiding after FY results

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.

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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.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Bodycote. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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