Analysts Lift Smiths Group Price Target Amid Margin Optimism and Moderated Revenue Growth Forecasts

Key Takeaways

• Smiths Group aims to enhance margins and streamline operations by divesting non-core businesses, focusing on high-performance technologies.
  
• Strategic investments and a share buyback program are set to boost revenue growth, EPS, and operating margins, supported by market trends in industrial sectors.
  
• Operational challenges from the cybersecurity event, margin pressures, and market uncertainties may hinder short-term financial stability and growth prospects amidst strategic divestments and external risks.

Catalysts

Operates as an industrial technology company in Americas, Europe, the Asia Pacific, and internationally.

• Smiths Group is increasing its focus on high-performance technologies for efficient flow and heat management, intending to streamline operations and enhance margins through the sale or demerger of Smiths Interconnect and Smiths Detection. This will make Smiths a more focused business, likely improving net margins and earnings.
  
• The company is executing a £500 million share buyback program and plans to return a significant portion of disposal proceeds to shareholders, effectively increasing earnings per share (EPS).
  
• Smiths Group's Future Smiths strategy includes setting new, higher medium-term targets for organic revenue growth, EPS growth, and operating profit margins. These targets are backed by supportive market trends in industrial, energy, and aerospace sectors, which should enhance revenue and operating margins.
  
• The acceleration plan aims to deliver £40 million to £45 million in annualized benefits at a cost of £60 million to £65 million. This plan focuses on process improvements and cost rationalization, driving operating margin expansion.
  
• Continued investment in R&D, strategic bolt-on acquisitions, and capital expenditure in automation and capacity, particularly in John Crane and Flex-Tek, are expected to fuel future organic revenue growth above market averages.

Smiths Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Smiths Group's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.5% today to 12.4% in 3 years time.
• Analysts expect earnings to reach £403.2 million (and earnings per share of £1.3) by about September 2028, up from £306.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.0x on those 2028 earnings, down from 24.9x today. This future PE is greater than the current PE for the GB Industrials industry at 22.2x.
• Analysts expect the number of shares outstanding to decline by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Smiths Group Future Earnings Per Share Growth

Risks

• The cybersecurity event in January caused disruptions in John Crane, impacting revenue growth and leading to a slower recovery due to the company's vertical integration. This may affect short-term revenue and operational efficiency.
  
• There is a forecasted headwind from the mix impacting margins, with a 60 basis point contraction in the first half due to higher growth from lower-margin businesses, which could limit future operating profit expansion.
  
• The separation of Smiths Interconnect and Smiths Detection introduces operational risks and potential challenges in executing divestments, which may impact financial stability and future revenue growth.
  
• Flex-Tek's growth is tied to the U.S. housing market recovery, which remains uncertain due to recent declines in new housing permits and starts. Prolonged weakness could impact future revenue and margins.
  
• Exposure to ongoing U.S. tariffs and supply chain uncertainties requires careful monitoring and mitigation; any adverse developments could impact operating costs and net margins.

Valuation

• The analysts have a consensus price target of £23.965 for Smiths Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £27.0, and the most bearish reporting a price target of just £18.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £3.3 billion, earnings will come to £403.2 million, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of £23.32, the analyst price target of £23.96 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.