Smiths Group: Strong Execution Year to Date; Shares Screen As Fairly Valued

Smiths Group’s SMIN performance remains impressive in late 2023. Consequently, we think the narrow-moat engineering firm remains on track to deliver on its recently upgraded guidance for organic revenue growth of about 10% and moderate profit margin accretion in 2023. We expect full-year 2023 EBIT of GBP 478 million, a 14.6% year-on-year uplift, when Smiths Group reports on Sept. 27. While the group’s performance has been noteworthy in 2023, Smiths Group shares screen as fairly valued and trade at a modest 4% discount to our time value of money adjusted GBX 1,700/$21.50 fair value estimate.

During the first half of the year, Flex-Tek and Smiths Interconnect were the strongest performers, but management had warned of softness in end markets. Air travel returned with enthusiasm, aiding performance in the Flex-Tek segment, but was set back by the slowing U.S. construction business. However, specific performance figures were not given in the trading update. Conversely, Smiths Interconnect declined year over year, seeing weakness throughout the segment.

The Smith Detection segment had a strong third quarter reflecting the timing of some large original equipment deliveries, reversing what previously had been a weak first half of the year. Management anticipates continued strong performance as they execute on a record order book for the segment. Similarly, demand has been strong for the John Crane segment in 2023 year to date with strong conversion to revenue from a healthy order book.

Our view of the long-term fundamentals for the group remains intact. Smiths Group is a longtime supplier to the Transportation Security Administration, most recently in June when the company was awarded a contract for its computed tomography cabin baggage screeners. This is just one of Smiths Group’s many niche businesses, which hold industry-leading positions, each producing admirable margins and returns. However, growth across the group is inconsistent.