While Smiths Group’s (LSE: SMIN) skywards march may be showing little sign of relenting (the stock has gained 44% in the past year alone, and hit fresh 10-year peaks this week), I reckon the business still provides plenty of upside for savvy investors.
Smiths Group is proving a master at riding out difficulties in its critical end markets, and while underlying revenues stagnated year-on-year during the six months to January 2017, investors continue to buy into the company’s turnaround story.
A dedication to enhancing returns saw the engineer’s operating margins balloon 130 points during August-January, to 17.1%. And this helped pre-tax profit surge 31% in the period, to £248m.
Meanwhile, Smiths’ self-help measures also helped its free cash flow sprint 44% higher in the half-year to January, to £252m.
A subsequently-stronger balance sheet is enabling it to double-down on R&D investment as well as to pursue exciting acquisitions. For example, the engineer completed the $710m purchase of Morpho Detection from Safran this month in a move that could prove transformative for revenues at its Detection division.
A titan transformed
While Smiths may have endured some earnings turbulence in recent times, City brokers predict that fiscal 2017 will prove a watershed year for the business and lay the foundations for sustained bottom-line growth.
In the period to July 2017 an 11% bottom-line rise is predicted, leaving it changing hands on a P/E ratio of 17.4 times. And a further 3% increase is chalked-in for 2018.
Smiths is above the FTSE 100 forward mean of 15 times. But I reckon the company’s impressive transformation strategy and improving product mix, allied with its huge exposure to the US (almost half of total revenues are sourced from the country), should set it up for impressive long-term profits growth.
Passing the test
Intertek (LSE: ITRK) has been no stranger to extreme share price strength in recent months either, the product testing specialist rising 17% since the start of 2017 alone.
Investor appetite has been boosted by news in March that underlying sales rose 8.8% in 2016, and that organic revenues at its Product and Trade arms (divisions that collectively account for nine-tenths of total earnings) leapt 4.1% in the period.
With demand for Intertek’s core products still surging, the Square Mile’s army of brokers expect the firm’s earnings to keep rising in the medium term at least, and have pencilled-in expansion of 9% and 7% in 2017 and 2018 respectively.
Such projections also leave the business looking a tad top-heavy on paper, the firm currently carrying a prospective P/E multiple of 22.1 times. But I reckon the business fully merits this rating.
The complexities of the global economy, and the subsequent size of the quality assurance segment, mean that Intertek, with its presence in more than 100 countries, is in the box seat to keep punching solid earnings growth. And an appetite for acquisitions, such as the business snapping up German vehicle tester KJ Tech Services just this month, should provide the top line an extra shot of juice.
