Analyst Note| Denise Molina, CFA |
Smiths Group reported in-line full-year 2020 results with a 1% decline in organic revenue and adjusted EBIT margin down 200 basis points to 15%. However, the shares sold off 8% after the release with management declining again to provide guidance, in contrast to some other industrial companies. The underlying difference relative to peers is that around 40% of Smiths' revenue is tied to capital spending by airport operators and the energy sector. We expect the demand recovery to be slow for the company's end markets and forecast a return to revenue growth only in 2024, with just a 0.5% revenue compound annual growth rate for 2019-23. However, we see value in the shares, which trades at a 22% discount to our GBX 1,690 fair value estimate. Growth will come from a return to normal oil consumption levels and airport operators upgrading luggage scanners to analyse liquids and electronic equipment inside luggage. Our narrow moat rating is intact.