ii view: Smiths Group raises forecasts

A diversity of end customer markets and with management continuing to pursue an improvement plan to accelerate growth. Buy, sell, or hold?

Third-quarter trading update to 30 April

Chief executive Paul Keel said:

“Q3 was another strong quarter for Smiths, building on the record performance we achieved in the first half.  We've now delivered eight consecutive quarters of growth, enabled by our strategy of accelerating growth, improving execution, and investing in our people. “

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ii round-up:

Diversified engineer Smiths Group (LSE:SMIN) today further lifted its full-year sales estimate as it continued to see strong demand across most of its end markets such as aerospace and renewable energy components. 

Full-year organic sales, stripping out acquisitions, are now expected to rise by around 10% year-over-year compared to a half-year forecast of at least 8%, with a moderate improvement in profit margins still expected. 

Shares in the FTSE 100 company rose by 1% in UK trading having come into this latest news up by almost 7% year-to-date. That’s similar to aerospace giant Boeing Co (NYSE:BA) and ahead of a near 3% rise for the FTSE 100 index itself. 

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Smith’s supplies niche products to industries including oil and gas, chemical makers, life sciences, pulp & paper and aircraft manufacturers. 

Both good volume and price growth fed into the third quarter performance with its energy component related John Crane division continuing to see significant demand across all segments. 

The detection division, making items such as airport luggage scanners, had a particularly strong quarter reflecting the timing of some large original equipment deliveries, while growth demand from aerospace customers at its fluid and gas carrying tubes or Flex-Tek division more than countered weaker demand from the construction industry. 

Only demand for its Interconnect division supplying electronic connectivity components often in harsh environment such as outer space witnessed softer demand. 

Overall, organic sales for the nine-months to the end of April climbed 13.4% year-over-year, marginally down from the 13.5% growth reported at its interim results. 

Full-year results to the end of July are scheduled for 26 September. 

ii view:

Specialist engineer Smiths divides its products into the four core areas of general industrial, safety and security, energy, and aerospace. Its businesses all share the characteristics of being well-positioned in growing markets, technology-led, asset-light and with a high proportion of aftermarket revenues. Management continues to pursue an improvement plan to accelerate growth, strengthen execution and invest in innovation. It previously sold its medical device business to concentrate purely on specialist engineering.

For investors, the tough economic backdrop, including rising interest rates, cannot be forgotten. Elevated costs for businesses generally and continued supply chain challenges warrant consideration. So does Smiths' exposure to currency movements, with less than 3% of sales coming from the UK. 

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On the upside, its diversity of product, geographical region and underlying customer sector offer attractions. A strategy focusing on growth, improving operational execution, and enhancing its people is also noteworthy, while an estimated future dividend yield of around 2.5% is also not derisory.  

On balance, and while some caution appears sensible, an analyst consensus estimate of fair value at over £18.50 arguably gives scope for further optimism. 

Positives: 

• A diversity of business type, underlying customer, and geographical location
• High proportion of aftermarket revenue

Negatives:

• Exposure to volatile oil and gas energy markets and companies                       
• Uncertain economic outlook

The average rating of stock market analysts:

Buy