Bodycote: quality, inflection, and growth at a reasonable price

Like many of us here in the Stockopedia community, quantitative metrics are the foundation of my investment strategy – everything from screening for opportunities and stress-testing my ideas.

But I also run thematic views alongside the numbers. For me, the combination has led me toward several years of successful investment in AI hardware and infrastructure – long may that continue.

Another is a quieter preference for industrials with very little AI disintermediation risk -- businesses like Bodycote (LON:BOY), where heat treatment requires physical furnaces and metallurgical expertise. It’s also a business that leverages customer relationships built over decades. No Claude algorithm is replacing that.

Right now, the proposition looks inviting. It’s not a stock I own yet, but it’s been on my watchlist for some time.

The Pitch

Bodycote shares are now trading where they were before Apollo Global Management made an approach for the company – the parties ended talks over a £1.52 billion takeover proposal on 5 June. Cleansed of the takeover premium, the value proposition is looking more attractive as the margin of safety returns.

Bodycote is the world's largest provider of outsourced heat treatment and thermal processing – several times larger than its nearest peer in what has historically been a fragmented sector -- with long-term relationships across aerospace, defence, and automotive. It's the kind of business that's genuinely difficult to replicate.

Like many British industrial companies in the post-pandemic world, there’s a restructuring programme involved and it’s almost complete. After a tough run, core revenues turned positive in H2 2025, while an £80 million buyback is supporting earnings per share growth.

Most importantly, it’s a quality company at a good price. At 13.6 times forward earnings with 16% EPS growth forecast and a 3.4% yield covered twice by earnings, the valuation is undemanding. Seven analysts cover the stock with a consensus target 20% above today's price.

Source: 2024 Capital Markets Day

The Big Picture

The world is spending more on the things Bodycote makes possible. Defence budgets are rising -- Europe in particular is rearming at a pace not seen since the Cold War. Commercial aerospace has order books stretching a decade, with Boeing and Airbus still working through a post-pandemic production backlog.

Demand for industrial gas turbines is also strengthening, particularly in the US, as power infrastructure investment accelerates to meet growing electricity demand from data centres, as well as electrification and other industrial activity.

Space applications, including rockets and satellites, are also emerging as a tailwind that appears largely absent from analysts' forecasts.

Each one of those sectors depends on perfectly engineered metal components. And many of those components pass through a heat treatment process in order to meet the performance and safety standards required.

• Aerospace & Defence is Bodycote's largest and fastest-growing end market, with A&D revenues accelerating through FY25 and into FY26.
• Industrial Gas Turbines delivered growth in FY25 and remain a key driver as energy infrastructure investment accelerates globally.
• Outsourcing is a structural tailwind -- OEMs increasingly don't want to own heat treatment capacity in-house, and Bodycote is the default beneficiary.

Source: FY2025 results

Going Deeper

The restructuring story is worth understanding in some detail, because it explains both where the margin pressure has come from and where the company is going.

Under the Optimise, Perform and Grow framework, Bodycote has been deliberately shedding lower-quality, automotive and industrial-focused sites – it’s taking a short-term hit to concentrate capital on higher-margin Specialist Technologies and faster-growing end markets.

That process is now almost done. By the end of 2026, around 85% of the 31 non-core sites will have been exited, and the business that emerges will be structurally different and likely structurally better than the one that went in.

• Specialist Technologies currently represents 31% of group revenue on a post-Optimise basis, with management targeting 35-40% by 2028 -- a mix shift that matters because the division carries structurally higher margins than the rest of the core business. Management also points to higher barriers to entry.
• The Optimise programme delivered £4 million of profit benefits in 2025, is on track for £4 million in 2026, and targets at least £15 million of run-rate benefits by mid-2027 -- with a separate operational efficiency programme (Perform) targeting a further ~100bps of margin improvement by 2028 -- management is aiming for >20% operating margins by 2028.
• The total global thermal processing market is worth around £30 billion, according to Bodycote’s 2024 capital markets day -- of which only £6bn was outsourced. At the time, Bodycote held approximately 15% of that outsourced market with the company predicting the outsourced share to grow as OEMs increasingly choose not to run heat treatment capacity in-house.
• 2026 has started well. Core revenues grew 9% in the first four months of the year, against a -5% prior year comparator. This was led by Specialist Technologies at 16.5%. Management maintained its full-year guidance for core organic revenue growth and improved operating margins at the May trading update.

Source for all of the above: 2024 Capital Markets Day

Valuation

The stock is roughly where it was before the Apollo approach – the bid premium has gone. But revenues are accelerating, the restructuring is nearly done, and earnings are forecast to grow 16% this year.

• Forward PE of 13.6x with 16% EPS growth points to a PEG ratio of around 1. The balance sheet also remains healthy, with net debt of £166 million.
• EV/EBITDA of 8.4x for the world's largest thermal processing business, with a dominant market position, looks undemanding and is lower than the industry average.
• Dividend yield sits 3.4%, with dividend cover at 2.05x on a forward basis, and an active £80 million buyback compressing the share count.
• StockRank of 88, with Quality at 80 and Momentum at 93. The Value rank of 42 is low but may improve as the business transition becomes clearer and metrics like FCF improve.

What The Brokers Say

Seven brokers follow Bodycote, and the consensus leans firmly towards Buy (two Holds, three Buys, two Strong Buys), with a price target of 854p -- about 20% above where the stock sits today.

• 20% upside to target, plus a 3.4% yield: Total return on the consensus case is pushing 25%. That seems like a reasonable hurdle for this business.
• Estimates stable to nudging up: Three-month EPS revisions are essentially flat for 2026 and modestly positive for 2027 – that’s a quiet signal that the recovery story is holding, not deteriorating.

The Bear Case

Apollo walked away from a deal to buy Bodycote. It ran a full process, had access to the books, and politely declined to proceed. They were very complimentary about the management, but whatever price they couldn't make work is worth keeping in mind. There are other points to consider too:

• Automotive weakness: Automotive is 22% of core revenues and conditions remain genuinely difficult with no clear near-term catalyst. It caps utilisation and keeps pressure on margins. Automotive revenues fell 1.4% in FY25.
• Cash conversion deteriorated: Free cash flow fell to £47.5m in FY25 with operating cash conversion dropping to 78% (from 90%). Capex is guided £80-90m in 2026 as the organic growth projects ramp -- the free cash flow story doesn't look pretty in the short term.
• Currency exposure: Around 70% of revenues are in euros and dollars. Sterling strength would be a meaningful headwind to reported numbers even if the underlying business performs well.

The Bottom Line

Bodycote is the world's largest outsourced heat treatment business, trading at a price that reflects a lapsed bid and a restructuring-year earnings trough rather than what the business is becoming.

The automotive drag is real, cash flow is lumpy near-term, and Apollo's decision not to pursue an acquisition is worth noting -- but none of it changes the underlying quality of the franchise, the clarity of the margin recovery roadmap, or the structural tailwinds from aerospace, defence and data centre demand.

At 13.6x forward earnings with 16% EPS growth, a 3.4% yield, and a consensus target 20% above the current price, the numbers are working for me. And if the earnings forecasts are actualised, I see room for a re-rating above the consensus.