Head to Head: Associated British Foods vs. Smiths Group
LONDON -- In this series, some of your favorite FTSE 100 shares go head to head in a three-round contest for superiority.
In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up the most points at the end of the contest.
ABF operates in five segments. Grocery, sugar, and ingredients have some similarities, but the group also manufactures animal feeds for the agriculture sector and has a clothing retail business in the form of the Primark chain.
Smiths Group also operates in five segments: threat and contraband detection, medical devices, energy, communications and engineered components.
ABF and Smiths Group have both outperformed the FTSE 100 over the past year. The Footsie is up 8%, while ABF's shares have risen by 26% and Smiths Group's by 14%.
Let's take our seats at ringside.
Round 1: Earnings
Recent share price (pence)
Last-year price-to-earnings (P/E) ratio
Current-year forecast P/E
Four-year earnings per share (EPS) compound annual growth rate (CAGR) (%)
Current-year forecast EPS growth (%)
Forecast operating margin (%)
ABF has strong earnings growth numbers, but Smiths Group edges the first round, scoring points on historic and forecast P/E, and operating margin. It's worth noting, though, that there are different norms for margins among different industries. ABF's businesses -- food manufacture, value retail, and animal feeds -- are in segments that tend to have lower margins than Smiths Group's more technology-based operations. So, giving some weight to that, the first round is tight indeed.
Round 2: Dividends
Last-year dividend yield (%)
Current-year forecast dividend yield (%)
Four-year dividend CAGR (%)
Current-year forecast dividend growth (%)
Forecast dividend cover
As with earnings growth, ABF scores strongly on dividend growth. The company also takes a point on dividend cover, giving it a narrow win over Smiths Group, which scores points for superior dividend yield.
Round 3: Balance sheet
Price-to-book (P/B) ratio
Net gearing (%)
ABF finishes strongly, taking both points in round three -- and the overall contest by two rounds to one. The points tally is ABF 7 and Smiths Group 5.
This was quite a finely balanced contest, with ABF being superior on growth measures and scoring points on the "quality" fundamentals of dividend cover and gearing. Not surprisingly, the market appreciates ABF's growth and solidity, and the company is on a P/E well above the market average and a dividend yield well below.
In contrast, Smiths Group took four of the five valuation-ratio points. However, while the company's P/E and yield are "cheap" relative to ABF's, they are not so cheap in absolute terms. A prospective P/E of 11.1 and dividend yield of 3.7% don't exactly scream bargain, especially given the fairly mundane earnings and dividend growth record.
Neither company is on my personal shopping list at their current ratings, although in both cases sum-of-the-parts analysts may argue that the P/E and yield don't tell the whole story.
Investing is by no means easy in today's uncertain world, which is why The Motley Fool has published a special free report, "Top Sectors of 2012." Our top analysts not only identify three favorable industries for 2012 and beyond, but also pinpoint one great company in each sector.
Are you looking to profit as a long-term investor? "10 Steps to Making a Million in the Market" is the Motley Fool's guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.
Further investment opportunities:
The article Head to Head: Associated British Foods vs. Smiths Group originally appeared on Fool.com.G.A. Chester does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.