Reshoring And Decarbonisation Will Reshape Aerospace And EV Sectors

Key Takeaways

• Margin and profit gains could exceed expectations due to accelerated core business improvements, strategic expansions, and strong performance in key segments.
  
• Industry trends, such as reshoring and decarbonisation, combined with operational efficiencies, position Bodycote for sustained revenue, earnings, and cash flow outperformance.
  
• Shifts in manufacturing trends, stricter sustainability demands, technological advances, and customer concentration threaten Bodycote's core business model, margins, and long-term earnings stability.

Catalysts

Provides heat treatment and thermal processing services worldwide.

• While analyst consensus sees margin improvement toward 20% by 2028 from optimization and noncore exits, the exceptional early progress-margin acceleration in core businesses and rapid overhead reductions-signals Bodycote could surpass consensus, achieving these targets sooner and even exceeding 20%, unlocking substantial upside to net margins and EBIT.
  
• Analyst consensus expects Specialist Technologies to support mid-term growth, but continued outperformance in aerospace and energy, premium pricing, plus recent strategic expansions in Asia and rapid market share gains, suggest this segment could deliver double-digit annual organic growth, well ahead of consensus forecasts, driving a step change in revenue and operating profit.
  
• Rising reshoring and supply chain localization by Western manufacturers is likely to trigger a volume inflection, rapidly lifting facility utilization from current mid-50% rates toward optimal levels, which would unleash significant operating leverage and sharply accelerate both revenue and earnings growth beyond market expectations.
  
• The accelerating shift to decarbonisation and lightweighting, especially in EV and aerospace, is already increasing demand for advanced alloys and treatments-Bodycote's leadership and early adoption reputation make it the clear beneficiary, supporting pricing power, share gains, and structurally higher gross margins.
  
• Bodycote's ongoing automation, rigorous cost controls, and "HEAT" operational framework are embedding productivity improvements and lean best practices across the network, suggesting a multi-year, self-reinforcing cycle of profit improvement and free cash flow growth that is underappreciated in current valuation multiples.

Bodycote Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Bodycote compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Bodycote's revenue will decrease by 0.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.6% today to 14.6% in 3 years time.
• The bullish analysts expect earnings to reach £112.9 million (and earnings per share of £0.64) by about July 2028, up from £20.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, down from 51.7x today. This future PE is lower than the current PE for the GB Machinery industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 3.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.32%, as per the Simply Wall St company report.

Bodycote Future Earnings Per Share Growth

Risks

• The continued long-term trend toward manufacturing reshoring and nearshoring in key markets threatens Bodycote's traditional business model, as its heat treatment facilities are located primarily in established production hubs; this shift could result in lost contracts and declining revenues over time.
  
• The increasing global focus on sustainability and stricter carbon reduction regulations puts Bodycote at risk of higher operational costs, as its energy-intensive processes may require substantial capital expenditure to meet new standards, negatively impacting future net margins and long-term earnings.
  
• Advances in materials science, including greater use of advanced composites and additive manufacturing, could reduce demand for Bodycote's core thermal processing services in sectors such as aerospace and automotive, undermining the relevance of its core offerings and putting downward pressure on revenue growth.
  
• Bodycote's dependence on large automotive and aerospace customers-segments experiencing ongoing vertical integration, supply chain challenges, and high customer concentration-may result in more aggressive price negotiations, the risk of client losses, and increased instability in both revenues and net profit margins.
  
• The company's slow rate of adopting new energy-efficient or digital process innovations compared to more agile competitors raises the risk that its high fixed cost and asset-heavy structure will limit flexibility during demand downturns; this could lead to margin compression and weak earnings during future industry cycles, especially if heavy and traditional industry end-markets continue to structurally decline.

Valuation

• The assumed bullish price target for Bodycote is £8.45, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Bodycote's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £8.45, and the most bearish reporting a price target of just £5.6.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £773.3 million, earnings will come to £112.9 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of £5.88, the bullish analyst price target of £8.45 is 30.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.