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One recovery stock I’d consider buying today, and one I’d ignore

Smiths Group (LSE: SMIN) is up almost 6% today on news that it plans to separate its underperforming medical division from its much stronger core industrial tech business. This is the news many investors had been waiting for.

The Smiths

Management said that breaking off Smiths Medical should allow the remainder of the group “to concentrate on growing as an Industrial Technology group, united by shared business characteristics and a common operating model.”

This should have the further benefit of freeing Smiths Medical to deliver on its full potential and capitalise “on its leading positions, large programme of new product launches and to exploit value creating opportunities in its rapidly changing market,” although investors will have to wait until its interim results in March to hear more.

Stretch out and wait

The group also published a first quarter trading update today that reported expectations for the year remain unchanged.

Investors in Smiths need something to feel less miserable about, with the stock down 22% over the past six months and trading 5% lower than five years ago. The medical devices and equipment division has done particularly poorly, having been hit by regulatory and contract challenges (now abating), but previous attempts to offload it floundered. At least it remains on course to grow in the second half.

Well I wonder

Its John Crane arm continues to show “good growth” with an acceleration in orders and further strong aftermarket demand. Smiths Detection expects a strong second half, supported by a robust order book, while Smiths Interconnect and Flex-Tek are growing well.

Investors are banking on the fact that the break-up of the £5.5bn FTSE 100 business will unlock value. Earnings growth has been patchy for years, while revenues have grown only slowly. Despite recent woes, there’s no discount with the stock trading at 14.9 times earnings, with a forecast yield of 3.3%, and cover of 2.1. One for your watch list, though.

Boeing, Boeing, gone

Aerospace and defence group Cobham (LSE: COB) is down around 2% today after publishing a trading statement for its first 10 months that was as expected, while it “continues to make progress in executing its turnaround programme.”

Underlying operating profit in Mission Systems and Communications and Connectivity was stronger, offsetting weaker performances in Advanced Electronic Solutions and Aviation Services.

The FTSE 250-listed group’s biggest headache is its KC-46 aerial refuelling tanker programme for Boeing. The US aviation giant is claiming as yet unquantified damages from Cobham, and is withholding payments of its invoices.

Damaging

Today, Cobham said it has delivered a total of 18 production-standard Centerline Drogue Systems under its KC-46 programme, adding that “qualification of the Wing Aerial Refuelling Pods remains in its early stages with risks relating to schedule and cost.” Discussions with Boeing continue regarding its “unquantified damages assertions and payment withhold,” so there’s no clarity for investors here, which hasn’t helped the share price.

Management anticipates “significant trading activity” in the final two months, but it’s hard to construct a buy case with the stock trading at a pricey 21.6 times forecast earnings (despite falling 48% in three years), and yielding just 0.6%.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.