Smiths Goes with a Bang
Engineering and technology specialist Smiths Group (SMIN) made an excellent start to the week by announcing that it had won an £84 million contract for a new terminal at Abu Dhabi airport to supply equipment to detect explosives.
It is one of the biggest airport contracts that Smiths has ever won and the shares climbed 16p to 1178p on the news, continuing a recovery from a low of 1,000p in mid-December. Two days later Smiths presented less than sparkling results for the half year to the end of January.
Revenue and profits were down a shade, though not disastrously, and Smiths had warned in advance that currency fluctuations would work against it. The modest dividend increase from 12.75p to 13p was a show of confidence.
The trouble with assessing Smiths is that it is a hotchpotch of loosely related businesses, with some improving and some struggling. This is a strength in terms of hedging bets, so that the whole business rarely suffers all at the same time, but it also means that there always seems to be a problem somewhere.
Currently, improvements at Smiths Medical, John Crane and Flex-Tek are mainly offset by declining revenue at Smiths Detection and Smiths Interconnect, where tough trading conditions persist. This divergence in performance will continue into the second half.
I had expected Smiths to run into profit taking on the results. Not so. The shares powered on to 1200p. Perhaps the comment that “we expect to deliver improved underlying performance in the second half” was sufficient reassurance. The rise in the value of the dollar will remove the adverse forex effects.
The yield is 3.5%, pretty much in line with the market, and the price/earnings ratio at 15 is above the sector, though marginally lower than the broader market. I feel the shares are fully priced given the uncertainty but they could be worth looking at if they do indeed run into profit taking in the near future.
If you are tempted to buy, take the trouble beforehand to read up about what the five divisions do and the varying outlooks for each. And do see this as a long-term investment, not a quick-fire winner.
Next Turn
There’s a hint of how topsy turvy life can be on the High Street in results from Next (NXT). Total sales are up 7%, profits are 12.5% higher and there is another leap in the dividend. Yet investors preferred to concentrate on the fact that sales are slowing and the shares fell heavily after Thursday’s annual results.
It’s not that Next is a poor investment. It’s just that the shares had gained £10 (15%) since early December and that really was too much too soon. The company stopped its share buyback programme because the price was too high.
Investors should take the hint. It’s probably worth selling at current levels and buying back in later. The shares could drop lower than is justified, just as they have soared further than they should.
Budget? What Budget?
George Osborne’s final Budget – surely he will be replaced after the election whoever wins – was like all his others, more about electioneering than economics. This one at least will have an election to go with it.
Long gone are the days when Budgets justified the reams that newspapers write about them and I don’t propose to add much to the latest screed other than to say that Osborne rightly resisted the temptation to embark on a massive giveaway.
There was nothing to give, certainly not the £6 billion windfall that some commentators banged on about. There’s no windfall, just the hope that the hole we are in is not quite as big as we thought. Even that is only a forecast, not a reality. The Budget deficit has not yet been halved, although Osborne claimed five years ago that the gap would be closed by now. The debt mountain continues to balloon.
That leaves investors where they were before the Budget. I cannot believe that the surge in share prices on Wednesday was anything to do with what the Chancellor said but we have now recovered ground lost in the retreat from the peak in the FTSE 100 index. A new high still beckons.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice. His views are not necessarily the views of Morningstar UK.
