I tried asking ChatGPT for shares that fit this description right now. And, along with some familiar names, it listed a really interesting FTSE 100 stock I haven’t looked at before.

The usual suspects

At the top of the list were Occidental Petroleum, Constellation Brands, and Domino’s Pizza. Solid choices, but no surprises – Buffett’s investment vehicle Berkshire Hathaway bought all three in Q3.

Further down though, one name stood out to me. It was Smiths Group (LSE:SMIN) – a FTSE 100 industrial company that I’d heard of, but never really looked into before. 

I thought I knew it as the firm that makes airport detection equipment. But when I took a closer look, it turns out the firm’s actually looking to sell off this part of the business.

What’s left though, looks like a very interesting operation to me. I’m not convinced it fits Buffett’s criteria, but it’s one I’m interested in taking a closer look at for my portfolio.

Unlocking value

Smiths is currently a firm in transition. It’s divesting a couple of its major units – including the detection business – to focus on two of its two engineered components divisions.

The remaining operations concentrate on parts that are mission-critical and relatively inexpensive. And that can often be a formula that leads to some impressive unit economics. 

When the cost of failure is high, customers are often willing to pay more to reduce the chances of this. As a result, suppliers are able to charge higher prices and maintain stronger margins. 

The move to focus on these is partly a response to activist pressure. The idea is that focusing on the component businesses should get the stock trading above its current multiple.

Structure

I’m a big fan of industrial conglomerates as investments in general. And one of the things I’m always interested in is how they approach the question of decentralisation. 

Operating through a central leadership team can reduce costs, but it can be slower in terms of decision-making. A decentralised model is faster, but it relies on more individual operators. 

Smiths looks to combine the two. Back-office functions like HR, finance, and IT are done centrally, whereas decisions about how to implement the firm’s principles are made locally.

The firm looks to access the benefits of both, but the obvious danger is it could end up with each set of shortcomings. With the firm in transition, I’m interested to see how it goes. 

Valuation

I don’t think Smiths Group meets Buffett’s investment criteria. Based on what I’ve heard in interviews with Todd Combs – a Berkshire Hathaway manager – it’s too expensive. 

That said, I can see a lot to like about the firm and I’m interested in it for my portfolio. It has a business model I like very much and has worked well for a number of other companies.

I’m not sure yet whether I think it’s a better opportunity than some of the FTSE 100’s other industrial conglomerates. But I’m very happy to have it on my list for further research.

The post I asked ChatGPT which shares fit Warren Buffett’s investment criteria right now. It named a FTSE 100 stock I hadn’t looked at before appeared first on The Motley Fool UK.

As I write, we’re looking at a rise of just 1.6% on the day. But Smiths shares have climbed 22% in the past 12 months and 81% in five years.

Pressure to move

The global engineering firm has been under pressure to consider a move to list on the New York stock market. US activist investor Engine Capital has been urging that as one possible way to maximise shareholder value. And US-listed stocks do often command higher price-to-earnings (P/E) valuations than their London sector rivals.

In a recent interview with Reuters, CEO Roland Carter said: “We never say never. We’ve been listed for over 110 years on the London Stock Exchange. So… we intend to remain a FTSE 100 company for now.“

But this new results update does seem to be heavy on the shareholder value theme. As an example, Carter also said: “Our strong cash generation enables us to continue to invest in the business… whilst being able to distribute significant capital to shareholders. We believe this will deliver substantial value creation.”

Strategic change

The company reminded us of “strategic actions to unlock significant value announced in January“, adding that “separation processes for Smiths Interconnect and Smiths Detection” are underway. Those divisions are involved in electronic component supplies and airport baggage screening.

The focus now is going to be on “high-performance industrial technology businesses of John Crane and Flex-Tek with significant opportunities to enhance growth, improve the financial profile and deliver strong returns.”

Smiths Group is clearly going through a time of transition. And I do think this investor activism has possibly got the board a bit rattled. But does the stock really look undervalued?

Valuation

That operating profit rise came from a 6.7% increase in revenue. And at the bottom line, it translated into earnings per share (EPS) of 55.5p, up 14%. Again, this is on a non-standard headline basis. Assuming it doubles for the full year, we’d be looking at a P/E of 18 based on the previous closing share price.

Using the statutory EPS figure of 48.8p would take the P/E to a bit over 20. And that’s largely in line with analyst forecasts of 21 for the current year. They also see it dropping as low as 16.5 by 2027.

That isn’t obviously cheap compared to the long-term FTSE 100 average. But for a company with strong earnings growth on the cards it could look a bit feeble. Then compare that with typical P/E values for similar companies listed in New York… and I think I’m starting to see what this Engine Capital investor is on about.

What next?

I feel the uncertainty resulting from ths ongoing transition could keep the share price down for some time. Still, analysts have a consensus price target of 2,300p, up 13%. For investors who understand the long-term prospects, Smiths surely could be worth considering at today’s valuation.

The post An activist thinks the Smiths Group share price is too low. These first-half results might show why appeared first on The Motley Fool UK.

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

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.

The post As the Smiths Group share price drops 7% on results day, I ask if it’s cheap appeared first on The Motley Fool UK.

Smiths Group (LSE:SMIN) might not be a household name, but its fingerprints are all over the modern world – from the depths of the oceans to the edges of space.

This FTSE giant could be significantly undervalued, potentially by as much as 41%. Now that’s enough to get me interested, let’s take a closer look.

Highly diverse

The firm operates in a dizzying array of sectors, from aerospace and defence to healthcare and energy. For instance, its John Crane division keeps the world’s industrial machinery humming with advanced sealing technologies. Smiths Detection safeguards borders and critical infrastructure. Meanwhile, Flex-Tek and Smiths Interconnect provide crucial components for everything from aircraft to 5G networks.

This diversity isn’t just impressive – it’s a key part of the company’s resilience. When one sector faces challenges, another often picks up the slack. It’s a business model that’s weathered world wars, financial crises, and a global pandemic.

The company recently reported organic revenue growth ahead of market expectations. More impressively, its free cash flow more than doubled year-on-year, showcasing operational efficiency and a really solid balance sheet.

The valuation

A discounted cash flow (DCF) calculation suggest the company could be trading at a significant discount – potentially up to 41% below fair value.

Now, it’s worth noting that valuation is as much art as science, and different analysts might arrive at different figures. However, by looking at the strong market position, diverse revenue streams, and improving financial metrics, I think the case for undervaluation becomes compelling.

Adding to the allure is management’s commitment to shareholder returns. The company recently announced a new £100m share buyback programme. For income investors, there’s a respectable 2.4% dividend yield on offer, with a conservative payout ratio of around 63% suggesting room for future growth.

Risks ahead

The firm operates in highly competitive markets, and geopolitical tensions or economic downturns could seriously impact demand for its products. The company’s global footprint, while a strength, also exposes it to currency fluctuations and varying regulatory landscapes. I’d also argue the recent departure of CEO Paul Keel also introduces an element of uncertainty regarding future leadership and strategy.

I’ve also got a slight concern about the reliance on government contracts, particularly in its Detection business, which can often lead to inconsistent revenues.

Ticks the boxes for me

However, for patient investors with a long-term horizon, I think many of these challenges could present an opportunity rather than a deterrent. The firm has a long track record of adapting to changing market conditions and emerging stronger from periods of uncertainty.

The push for more sustainable industrial processes plays right into the hands of its energy-efficient technologies. Increasing security concerns worldwide bode well for its detection systems. And the relentless march of connectivity and electrification aligns perfectly with its interconnect solutions.

In a market often fixated on the next big thing, this company offers something different – a blend of storied heritage and cutting-edge innovation, potentially available at a significant discount. For investors seeking a FTSE giant with both value and growth potential, I think Smiths certainly warrants a closer look.

The post Potentially 41% undervalued, I like the look of this FTSE giant appeared first on The Motley Fool UK.

FTSE 100 stocks struggle but Smiths performs well

Smiths has over 170 years of engineering expertise, predominantly in the defence and aerospace sectors.

So what’s happening with Smith shares? As I write, they’re trading for 1,628p. At this time last year, the shares were trading for 1,477p, which is a 10% increase over a 12-month period.

I’m conscious that many FTSE 100 stocks have suffered during this same period due to macroeconomic volatility so Smith’s share price performance is pleasing.

The bull and bear case

What drew my attention to Smiths recently were its full-year results released earlier this week for the 12 months ended 31 July 2023. I found them to be excellent. The business said it had record revenue growth, 18% higher than last year. In addition to this, operating profit soared 20% higher than last year and the business returned more than £350m to investors through a boosted dividend, 5% higher than the previous year, and a share buyback scheme.

In addition to this, my research showed me that Smiths has a good track record of performance. Since the pandemic, it has grown revenue and profit each year. However, I’m aware that past performance is not a guarantee of the future.

The firm’s investor returns policy looks enticing to me, especially the recent announcement of a completed share buyback scheme and bolstered dividend. This is at a time when many FTSE 100 stocks are cutting or freezing dividends. Smiths current dividend yield stands at 2.5%. This may not be the highest, but I’m more interested in consistent, stable dividends. However, I do understand dividends are never guaranteed.

Away from the bull case, I must note a couple of issues that could impact Smiths’ investment viability. Although I’m a fan of businesses completing acquisitions for growth, like Smiths has been doing for a long time, there’s always a risk these don’t work out. When this happens, it can be costly to dispose of a business. Investor sentiment, performance, and payout could take a hit.

Another issue for Smiths is the fact that there have been many supply chain issues in recent times globally. This could be particularly problematic for the business, with its products and reach. This could have a material impact on delivering its products to its customers, in turn, hindering performance and returns.

My verdict

To conclude, I like the look of Smiths and when I next have some cash to buy some shares, I’ll add some to my holdings.

It’s easy to get caught up in the fanfare and news cycle of blue-chip stocks with a household name. Smiths may not be that, but it looks like a good stock to buy, in my opinion and one investors should consider. It has a good track record, a solid balance sheet, and rewards its shareholders too.

The post So many FTSE 100 stocks are overlooked! Here’s one to consider buying appeared first on The Motley Fool UK.

Smiths has traditionally been involved in a number of engineering sectors. That includes aerospace, defence, and medical equipment. The company has now confirmed the sale of Smiths Medical to ICU Medical, Inc. The division had been up for sale for a while, with a previous deal with TA Associates on the cards.

Then on 8 September, Smiths announced a new agreement with ICU that would realise greater value. The company put the net value at $2.4bn, approximately $0.4bn higher than the TA transaction.

The confirmation came on the same day Smiths released full-year results, headlined “Stronger H2 performance; good momentum“.

Underlying revenue fell 2% for the year, but it’s turning around. The second half came in flat, while the company recorded revenue growth in the final quarter. But even if revenue growth was not sparkling, Smiths’ conversion of it into profit looks good.

Profit rising

Operating profit gained 7%, with operating margin improving by 1.4 percentage points. At a time when a lot of FTSE 100 firms are suffering margin squeezes, that’s a welcome change. First-half underlying EPS increased by 8%, and the board has lifted the full-year dividend by the same proportion to 26p per share.

On the current Smiths share price, the dividend yield comes in at 1.8%. That’s a modest yield, but it’s covered more than 3.5 times by earnings. I’d much rather see a modest-but-well-covered dividend from a company with strong cash flow than a big yield from a firm under intense balance sheet pressure.

On the cash front, Smiths recorded free cash flow of £383m, an increase of 40%. Net debt stood at £1,018m at 31 July. That’s a net-debt-to-EBITDA multiple of 1.6x (even including one-off restructuring costs). For a £5.6bn company with annual revenue of £2.4bn, that’s good enough for me.

Lagging the FTSE 100

Why do I rate Smiths as an overlooked FTSE 100 stock? Well, I previously had the company pegged as one to watch in September. It seemed at the time that investors weren’t too please by the upcoming Medical division sale. The Smiths share price has dipped below the FTSE 100 over the past six months. And it’s still down 18% since pandemic week in February 2020. Perhaps it’s got something to do with valuation.

On depressed 2020 earnings, the stock had been looking a bit hotly valued in terms of its P/E ratio. Even on pre-pandemic 2019 earnings, the current Smiths share price suggests a multiple of above 20. But on the underlying earnings the company has just delivered, we’re looking at a P/E of only around 15 now.

Outlook vs risks

The company reckons it has good order book momentum, and it expects revenue to return to pre-Covid levels during the current year. With improved operational efficiency too, the current valuation looks good to me.

There’s a downside, though. In the UK we’re facing increasing supply chain problems. And our economy still looks a bit fragile, with inflation set to climb above 4%. Those uncertainties, I fear, might keep Smiths Group overlooked for a while longer. I’d buy today.

The post Why is this overlooked FTSE 100 stock leading the market? appeared first on The Motley Fool UK.

Fears of a housing slowdown have been growing for months, though the nation’s housebuilders haven’t been seeing it yet. What will the outlook be like for Barratt Developments (LSE: BDEV)? We’ll have some idea on 2 September, with results for the year to June.

The company’s most recent update in July reported “strong demand across the country” and “excellent recovery of completion volumes.” Barratt completed 17,243 homes in the year, which is close to 2019’s figures.

Profits were expected to be at the top end of the range of market expectations. The company reckoned on year-end cash of around £1,315m too. That’s way above the £766m held at the end of June 2019. And I’m keen to hear what the company plans to do with it. It did say it “continues to recognise the importance of dividends to all shareholders.”

We’re a couple of months on from that statement now. So I also want to know if there’s been any sign of softening in the market in the early days of the 2021/22 year.

FTSE 100 engineering

Smiths Group (LSE: SMIN) suffered a hefty crash early in the pandemic. The price has been recovering, but it went off the boil a bit over the past month or so. At the time of writing, the engineering group’s shares are sitting on a two-year loss of around the 15% mark. The FTSE 100, meanwhile, is very close to break-even.

The latest drop appears partly due to the company’s agreement to sell the bulk of its healthcare division, Smiths Medical, for $2.5bn. Smiths should receive net cash of approximately $1.8bn (£1.3bn) from the sale, which looks good in these tough times. It says it “will be used to support investments in growth and enable a significant return of capital to shareholders.“

Smiths isn’t exactly known as a big dividend payer, with yields in recent years ranging 2.6-2.8%. And judging by the market reaction, shareholders aren’t overjoyed by the potential outcome of this sale. We should know more on 28 September when Smiths delivers full-year results.

High street bounce-back

One of my FTSE 100 high street favourites is due to reveal first-half figures on 29 September. I’m talking about Next (LSE: NXT), which has adeptly managed its mix of conventional store and online fashion retail for years. That helped the company through the lockdown days, and its shares have gained more than 30% over the past two years.

The most recent trading update in July was positive. Full-price sales for the 11 weeks to 17 July were 18.6% ahead of the same period two years previously (compared to pre-pandemic levels). Next lifted its full-year pre-tax profit guidance by £30m to £750m. The company expects to have around £240m in spare cash to return via special dividends too.

My fear though, is that the Next share price might be a touch overheated now as some competitors are only just getting their sales back on track. So I’m wondering if we might be in for a slow period for the stock.

The post 3 FTSE 100 stocks to watch for in September appeared first on The Motley Fool UK.

This split has been expected for a while and should leave this engineering group more focused on its industrial technology businesses. But shareholders don’t seem entirely happy. In this piece, I want to find out why the Smiths share price is falling — and whether I should buy the stock.

What’s happened?

Smiths Group has agreed to sell its Smiths Medical business to US private equity group TA Associates for $2.3bn (£1.7bn), plus a further $0.2bn dependent on future performance. Smiths will also retain a 30% stake in Smiths Medical, giving it the opportunity to benefit from future growth.

Shareholders are expected to receive a “significant” amount of this cash, although Smiths Group plans to retain some of the money to invest in the growth of its remaining businesses.

Management says that this deal is better than any of the other offers it’s received for Smiths Medical. However, Smiths’ falling share price suggests to me that not all of its shareholders agree with this view.

Why are Smiths shares falling?

The Smiths Medical deal was announced after the London market closed on Monday. So the 8% fall seen on Tuesday morning represents investors’ initial reaction to the sale. It’s quite a big drop for a FTSE 100 share — why aren’t shareholders happy?

I can see a couple of possible explanations. Investors may think Smiths Medical is being sold too cheaply. I’m not convinced of this. The medical business is being sold at a valuation of 9.7x EBITDA earnings. This seems fair to me, given recent slow growth.

Another possibility is that shareholders are disappointed that management has ruled out the idea of floating Smiths Medical as an independent business. I have more sympathy with this view. If I was a Smiths shareholder, I might have been interested in owning shares in Smiths Medical. I believe it could have long-term growth potential as an independent business.

Should I buy this FTSE 100 share?

One thing I’m sure of is that getting rid of the medical business is the right decision for Smiths. It just didn’t really fit with the group’s remaining operations, which all have a more industrial focus.

For example, Smiths’ companies make airport security scanners, industrial gas leak detectors, and hoses and connectors for gas and aerospace applications.

My sums suggest that the profitability of the remaining group could improve when the medical business is sold. I’d also expect the tighter focus to make it easier for new CEO Paul Keel to generate fresh growth.

Smiths has been on my watch list for a while. I’ve not bought the stock because I’ve felt it was a little expensive, given the group’s fairly average profit margins. If profitability improves — or the shares fall a little further — I may consider buying. Right now, however, I’m not quite convinced.

The post This FTSE 100 share is down 10% this week: here’s why appeared first on The Motley Fool UK.

A conservative stock to buy now

The first company I’d look at is Smiths Group (LSE: SMIN). It’s not a company that crops up a lot when talking about high-growth stocks to buy now. I think this is due to the fact that it’s a mature, diversified engineering group. However, this doesn’t mean that I can’t still achieve strong share price returns. 

Over the past 12 months, the Smiths Group share price is up almost 40% following the stock market crash. Given that some are concerned about the potential for another crash this year, I think the stock offers the right blend of defensiveness but also opportunity.

The defensive element to buying the stock right now comes from the industry. Smiths Group operates in several divisions including defence, electronics and medical. 

The opportunity side comes from a transformation process that started last year. The total costs of this is expected to be around £60m, but is anticipated to save £70m a year from 2022 onwards as the business takes on a more efficient structure. One element of this is the demerger of the medical division.

A risk to buying the stock now is the fact that the dividend payout was increased by 6% despite operating profit falling 11% in the six months to the end of January. Personally, I’d want to see cash retained in the business to support the transformation and fall in profit, to avoid unnecessary stress on cash flow.

Getting access to a successful fund

Next up is Pershing Square Holdings (LSE: PSH). This is an investment fund run by Bill Ackman and his team. It operates as a public listed stock like Scottish Mortgage Investment Trust. In short, the share price should track (with some deviation error) the value of the underlying investments within the fund.

Last year was a stellar year for the company, thanks to the volatility seen in the markets due to the pandemic. From being active and buying and selling at the right time, the share price is up 80% over the past year. 

Even though volatility has died down in recent months, I still see Pershing Square as a great buy right now. This is because of the continued optimism I’m seeing in global markets (particularly in the US). Earlier this month, the Dow Jones and S&P index made fresh all-time highs. Since well over 50% of the stocks held are based in the US, I think this bodes well for the share price.

The risk with Pershing Square is that it has the potential to make large losses, as well as large profits. Bill Ackman has had a colourful career as an investor. In 2017, he lost over a billion on an investment in Valeant Pharmaceuticals. So it’s clear that although returns recently have been great, I need to be careful.

The post 2 FTSE 100 stocks I’d buy right now if I had £1,000 to invest appeared first on The Motley Fool UK.

UK shares to buy

Whitbread (LSE: WTB) has been impacted more than most other businesses throughout the pandemic. The Premier Inn brand owner has faced the daunting reality of having most of its operations closed throughout the past 12 months.

The impact can be seen on its revenues. For its last financial year, the group reported revenues of just under £2.1bn. For the current financial year, analysts are projecting sales of just £648m. That’s a 70% decline year-on-year.

Further, the group is expected to report a loss of £530m, compared to a profit of £218m in the prior-year period — a swing of £748m. 

I think these figures clearly illustrate the challenges facing the group. Whitbread has bled money over the past 12 months, and it could be some time before this trend changes, especially if coronavirus restrictions last beyond the government’s current roadmap. 

However, I believe this is one of the best UK shares to buy because of its recovery potential. Estimates vary, but economists believe UK consumers have saved over £150bn throughout the crisis. When the economy opens up again, they may rush to spend those savings. Indeed, there have already been reports that some holiday firms are seeing a significant increase in the average cost of holidays booked compared to before the pandemic. 

This implies Whitbread may grow back stronger. Of course, this isn’t guaranteed, but I think the group has tremendous potential as a recovery play. 

That’s why I’d buy the stock for my portfolio today. 

Medical recovery

Another business that sits on my list of the best UK shares to buy today is engineering group Smiths (LSE: SMIN). This is an economic recovery play, but it doesn’t sit in the same bucket as companies such as Whitbread. 

Smiths is one of the world’s largest suppliers of medical products.

Over the past year, as the global medical system has been concentrating on coronavirus, routine operations have been postponed. Smiths’ engineering divisions have also been impacted. As a result, group revenues for the three months ended 31 October were down 2%. 

As the world recovers from the pandemic, I think the demand for services from engineering groups such as Smiths will rebound. That’s why I’d buy the stock for my portfolio today.

But that’s not to say the business doesn’t face challenges. Smiths has a solid reputation worldwide as an engineer, but this can’t be taken for granted. If the group skimps on quality or research and development, consumers make quickly grab market share. That may have a significant impact on revenue growth.

So think it would be sensible to keep an eye on these potential challenges as we advance. 

The post 2 UK shares to buy with £2k today appeared first on The Motley Fool UK.