Smiths Group, the FTSE 100 engineering conglomerate, is a master of the “behind the scenes”. Its Smiths Detection arm makes threat-spotting scanners for 90 per cent of the world’s airports; its John Crane business develops industrial seals to prevent leaks at refineries and for sustainable hydrogen production and carbon capture and storage. It also moves fluids for the medical and construction sectors, and built the communications modules for the Mars Rover.
Despite this technological innovation, though, Smiths’ shares have failed to impress. They hit a near-£18 peak in March but are changing hands at about £16 today — roughly the same as five years ago. This is despite American chief executive Paul Keel trimming and tidying up the business since he took over in 2021, when Smiths sold its medical division to ICU Medical for $2.7 billion (£2.2 billion).
Recently, concerns over faltering building levels in the United States, and fairly sluggish growth at Smiths’ security arm, have deterred investors. But while growth has proved snail-slow in some divisions, it is picking up. At results last month, Smiths reported profits up a fifth to £501 million on revenues 18 per cent higher at £3 billion, beating expectations. This topped off nine consecutive quarters of growth. Profit margins have widened as Smiths’ customers have swallowed price hikes.
Keel expects more of the same in 2024, telling analysts to pencil in 4 to 6 per cent organic revenue growth for the year, with “continued margin expansion”. The order book is up and it is telling, too, that Smiths has a high percentage of after-sales. John Crane’s seals are in strong demand for the low-carbon economy, while Smiths’ balance sheet is strong. The City thinks it has an “undemanding valuation”.
Mark Davies Jones, an analyst at wealth manager Stifel, says it “has become a much more attractive and dependable investment” thanks to the sale of its medical division “and the tighter and more urgent operational management of the current Smiths team”.
This is a business that shares the spoils of its success with investors: Smiths has been paying a dividend for more than 70 years and at last month’s results it set out a total payout for the year of 41.6p, a 5 per cent increase.
Like its products, Smiths’ management team has been toiling behind the scenes and that looks set to pay off in the coming years, especially as the firm expands into green energy and grows in AI, too. The stock is trading at a modest price-to-earnings ratio of 16.4, cheaper than listed engineering rivals. The time looks right to buy Smiths.
