Dividend fears make Bodycote expensive

Wait for Greencore to beef up its earnings

It has not been the longest recession in US history, but it has been enough to put a big dent in the reputation of Bodycote International. The group, which carries out specialised metals testing for manufacturers, was telling the City a year ago that it might be able to withstand the worst effects of the industrial downturn because, in tough times, manufacturers are likely to want to save money by outsourcing these functions to the likes of Bodycote.

Not yet, they're not. Bodycote has won some outsourcing contracts, but they take up to two years to negotiate. So for now, profits are still in the doldrums. The company was forced into another profit warning yesterday, saying that, although there have been "positive signals", slow trading has continued since its March results. The house broker shaved another 11 per cent off its forecast of 2002 profits.

The company has tried to react fast, and 550 of its 7,700 jobs are going. But with no sign of an upturn in the telecoms equipment market, and with aeroplane engines in the doldrums after 11 September, the ongoing strength of sales to the European oil and gas market have not been enough to offset such widespread weakness.

No doubt the group is rueing its £75m acquisition of Lindberg, a rival, at the end of 2000. The deal brought down group margins, increased Bodycote's exposure to the slowing US, and forced it to shell out on expensive restructuring. This is important because the company has always had a problem stemming the outflow of cash. Even now, with a penny-pinching new management team, it is not expected to be cash positive this year. Its generous dividend will have to go if an upturn does not come soon.

Even ignoring restructuring charges, earnings per share will be just 14.9p this year, making the stock (down 36.5p to 212.5p) far too expensive.

Wait for Greencore to beef up its earnings

If you ate a sandwich yesterday there is a strong chance it was made by Greencore. The Irish group slaps fillings between bread for companies from Boots to British Airways at a rate of over 150 million a year. And the business is growing at over 20 per cent a year, like the rest of Greencore's chilled and frozen foods division, which it bought last year.

Since then Greencore has been paring the business to concentrate on high growth convenience foods. It slimmed down to 16 businesses from 38, generating €190m (£121m) from disposals, which has slashed debt to just over €600m from €874m. With high single-digit sales growth, this should, eventually, drive earnings growth.

First though, Greencore must complete its restructuring programme and find a solution to its troublesome bread business, Kears, which has been hit by industry overcapacity and supermarket price wars. Consolidation is expected and Greencore expects to play its part. Elsewhere, the ingredients business should be poised for a better 12 months after a costly dispute with sugar growers was sorted out.

Greencore made pre-tax profits of €22.1m in the six months to 29 March up 32 per cent. Boosted by the integration of Hazlewood Foods, the chilled and frozen foods business, sales rose 45 per cent to €816m.

The shares, off 2p at 205.5p, look cheap against the food sector. But investors should wait for evidence of earnings growth before tucking in.