Results rally at Smiths Group as stock markets fall

Our head of markets reports on stock activity both sides of the pond and runs through annual results from Smiths Group.

The final week of the third quarter 2021 is currently beset by concerns of persistent inflation on both sides of the pond, as supply chain shortages spread their net further.

The oil price has seen the results of a current imbalance arising from worries of tightening supply, with the price now having risen by 55% in the year to date. Meanwhile, the shortage of lorry drivers is having an impact on the broader delivery of goods in both the US and the UK, and with wage rises likely to follow, there is an increasing unease that inflation could be more persistent than originally thought.

In the US, this drove a switch out of growth stocks into value, with both the Nasdaq and S&P500 losing ground. The Dow Jones index posted a modest gain, with rising yields boosting financial stocks and the oil price inevitably causing a spike in energy stocks.

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For the UK, meanwhile, the picture is also muddied, with a potential reticence from investors to commit fresh capital as the quarter comes to a close. In the year to date, the FTSE100 remains ahead by 9.3% and the FTSE250 by 15.2%, although more recently progress has been somewhat pedestrian with broader global economic concerns in play.

Smiths Group (LSE:SMIN) confirmed a binding agreement to sell its medical devices unit to ICU Medical of the US for $2.7 billion, with over half of the net proceeds to be returned to shareholders in the form of share buybacks.

The strategic rationale to focus on its core industrial technology capabilities, alongside a restructuring programme which is already showing the desired effects, is proof positive of a company with high aims.

Operating margin has improved in the year to July as a result of tighter cost control, while free cash flow has grown significantly. Operating profit overall grew by 7%, which was a slight miss to market expectations. Further headwinds came in the form of foreign exchange translation, while revenues dipped by 6% as largely expected. An otherwise upbeat outlook statement noted ongoing supply chain challenges and economic uncertainty as potential bumps in the road in the nearer term.

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Mixed trading in the first part of the year has dragged on a share price which has fallen 13% in the last six months. Over the last year, however, the shares have gained 5%, as compared to a jump of 19% for the wider FTSE100, with investors remaining convinced by the wisdom of the sale of the medical devices unit.

With clear operating momentum and a brisk order book in place, the market consensus of the shares as a 'strong buy' reflects solid optimism on prospects.