The Smiths Group (LSE: SMIN) share price had been growing nicely since May. But that changed on Tuesday (24 September) after the engineering firm posted full-year results.
Organic figures show a 5.4% rise in revenue, with operating profit up 7.1%. Headline earnings per share (EPS) rose by 8.3%.
And the company lifted the dividend by 5.2% to 43.75p, for a 2.4% yield on the previous close
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Missed targets
These results represent a slight miss against forecasts. And the share price fell 7.4% in early trading, wiping out all the summer gains.
The update also cautioned us that demand in the John Crane and Smiths Detection divisions is likely to soften in the coming year.
The board announced plans “to accelerate the realisation of our medium-term margin target and deliver process improvements for resilience and scalability over the longer term.“
In other words, it’s cutting cut costs to save money. The aim is for £30m-£35m in annual savings, with a one-off cost of £60m-£65m.
Acquisitions
Two new acquisitions, of US firms Modular Metal Fabricator and Wattco for a total of up to £110m, failed to rally the market. So what does the Smiths Group valuation look like?
Headline EPS of 105.5p gives us a price-to-earnings (P/E) ratio of 17.3 based on Monday’s close price. On the day that’s dropped to 16 so far. Not too bad?
Well, the statutory EPS figure of 72.3p makes it look less attractive. That puts the previous close P/E at 25, down to 23.4 now.
That’s the kind of valuation that I could see as cheap for a firm with good growth forecasts and hitting its targets. But maybe not for a company that just fell short and is on a cost-cutting plan.
Forecasts
Saying that, forecasts look strong. And I doubt they’ll need to be scaled back much as a result of this latest.
Analysts expect EPS to grow 20% between now and 2026, with a 13% dividend rise. That’s at a time when interest rates are likely to fall. And the signs are that global economies are getting back on track.
Hmm, that might even make it a great time to be snapping up cheap acquisitions in the US. Engineering could, I think, be in for a bullish few years.
Comparisons
It might help to compare the valuation with another British engineering firm, defence and aerospace giant BAE Systems.
BAE is on a forecast P/E of 19 for this year. It might have a more obvious defence boost to look forward to, with EPS expected to grow 25% between 2024 and 2026. But Smiths should benefit too.
The two valuations aren’t far apart, and the dividend yields are about the same.
Taken on its own, I think Smiths is a stock I’d consider buying now, even with the risks of a partial slowdown coupled with the short-term need to cut costs.
But set against the wider market, I see options for my own money that better fit my strategy.
