Smiths Group (LSE: SMIN) posted a 9.5% jump in first-half headline operating profit on Tuesday (25 March), but the share price didn’t do much in response.
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.
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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.
