Is Now The Time To Put Smiths Group (LON:SMIN) On Your Watchlist?

By
Simply Wall St
Published
February 21, 2022
LSE:SMIN
Source: Shutterstock

Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.

In contrast to all that, I prefer to spend time on companies like Smiths Group (LON:SMIN), which has not only revenues, but also profits. Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.

See our latest analysis for Smiths Group

How Fast Is Smiths Group Growing?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. Smiths Group managed to grow EPS by 11% per year, over three years. That's a good rate of growth, if it can be sustained.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. Smiths Group's EBIT margins have actually improved by 4.4 percentage points in the last year, to reach 14%, but, on the flip side, revenue was down 5.6%. That's not ideal.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

earnings-and-revenue-history
LSE:SMIN Earnings and Revenue History February 21st 2022

While we live in the present moment at all times, there's no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for Smiths Group?

Are Smiths Group Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

Any way you look at it Smiths Group shareholders can gain quiet confidence from the fact that insiders shelled out UK£193k to buy stock, over the last year. And when you consider that there was no insider selling, you can understand why shareholders might believe that lady luck will grace this business. Zooming in, we can see that the biggest insider purchase was by CFO & Director John Shipsey for UK£99k worth of shares, at about UK£14.42 per share.

I do like that insiders have been buying shares in Smiths Group, but there is more evidence of shareholder friendly management. I refer to the very reasonable level of CEO pay. I discovered that the median total compensation for the CEOs of companies like Smiths Group with market caps between UK£2.9b and UK£8.8b is about UK£1.9m.

The Smiths Group CEO received UK£1.2m in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.

Is Smiths Group Worth Keeping An Eye On?

As I already mentioned, Smiths Group is a growing business, which is what I like to see. And that's not all, folks. We've also seen insiders buying stock, and noted modest executive pay. If that doesn't automatically earn it a spot on your watchlist then I'd posit it warrants a closer look at the very least. Even so, be aware that Smiths Group is showing 2 warning signs in our investment analysis , you should know about...

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Smiths Group, you'll probably love this free list of growing companies that insiders are buying.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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