Smiths Group: Execution Remained Strong in Late 2023, Shares Remain Fairly Valued

Narrow-moat Smiths Group’s SMIN late-2023 performance was impressive, resulting in full-year 2023 organic revenue growth of 11.6%, eclipsing its most recent guidance of 10%. Consequently, Smiths Group’s delivery of full-year EBIT of GBP 501 million tracked 5% ahead of our forecast. Operating margins expanded 20 basis points to 16.5%, also in line with management’s expectation of moderate margin expansion. Following a bumper year in 2023, Smiths Group expects organic revenue growth to slow in 2024—guiding in the range of 4% to 6%, in alignment with its medium-term target range—while also expecting modest profit margin expansion. We are yet to update our financial estimates to reflect Smiths Group’s revised guidance and other recent developments. Nonetheless, we maintain our fair value estimate of GBX 1,700.

Smiths Group’s two largest segments delivered in 2023. The John Crane segment grew 15.2% with strong growth across energy and industrial in both original equipment and aftermarket. The segment improved execution considerably, raising margins 170 basis points to 22.6% on improved plant effectiveness and eased supply chain issues. While similar improvements will not continue, this is a segment where the company continues to invest with strong future prospects given the 15% increase in orders in 2023. The Smiths Detection segment grew 16.4% with strong original and aftermarket performance in aviation and other security systems, or OSS. Margins only increased 10 basis points, however, as original equipment orders grew faster than aftermarket, resulting in a less profitable revenue mix. Looking forward, a strong orderbook and positive developments in OSS are tailwinds for the segment.

Our view of the long-term fundamentals for the group remains intact. The Transportation Security Administration remains a key supplier, a component of the OSS end market that is gaining momentum heading into 2024.