LONDON -- For a country that is said to have lost its industrial base, there are plenty of flourishing engineering companies in the FTSE 100, such as £5.2 billion Smiths Group . This is more than an engineer, it's a global technology business whose five divisions cover everything from contraband detection to medical devices, energy and communications. Should I buy it?
Smiths Group has just published a market-pleasing interim management statement, showing rising underlying revenue across all five of its divisions in the nine months to May 4. Underlying headline operating profit also rose, as did headline operating margin, with the exception of Smiths Medical, where profits have been knocked by a new U.S. medical device tax, and substantial investment in sales and marketing.
Investor enthusiasm has been tempered by recent management caution, which has been warning of tough trading conditions to come, and loss of revenues due to government spending cuts. Yet the share price has had a solid 12 months, rising 32% against 24% for the FTSE 100 as a whole. Over three years it has slightly underperformed, rising 28% against 32% for the index. Investors can't complain, but they won't be breaking out the bubbly either.
Smiths Group is bagging a steady supply of new contracts. Recent wins include a €17.8 million deal to supply Azerbaijan customs with high-energy cargo scanners, an order to supply 10 Spanish airports with 120 high-speed x-ray scanners, and a two-year contract to provide £18m of biological testing equipment to the Ministry of Defence. As with many FTSE stalwarts, it is making faster progress overseas, with emerging market sales recently rising 9% to represent 15% of group revenues. Management reckons it can deliver "significant opportunities to generate value for shareholders over the medium-term".
Go for growth
At £13.35 a share, Smiths Group is valued at 14.6 times earnings. Its 2.8% yield is below the FTSE 100 average of 3.4%, although it is covered 2.4 times, which gives scope for further progression. In March, management hiked the dividend 6% to 12.5 pence. Credit Suisse and JP Morgan Cazenove have just reiterated their respective outperform/overweight ratings with target prices of £14.20 and £15, which confirms my view that Smiths Group is a solid portfolio hold, if hardly a raging buy.
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