As Smiths Group’s share price falls 7% on earnings day, I ask if it’s cheap

This Smith Group (LSE:SMIN) share price had been rising nicely since May. But that changed on Tuesday (September 24), when the engineering firm released its full-year results.

Organic data shows revenue growth of 5.4% and operating profit growth of 7.1%. EPS growth of 8.3%.

The company also raised its dividend by 5.2% to 43.75 pence, giving a yield of 2.4% compared to the previous close

Unachieved goals

The results were a slight disappointment compared to expectations. And the share price fell 7.4% in early trading, wiping out all of the summer’s gains.

The update also warns us that demand in the John Crane and Smiths Detection divisions is likely to weaken next year.

The board announced plans to “to accelerate our medium-term margin target and introduce process improvements that will increase resilience and scalability over the longer term.“

In other words, it’s cutting costs to save money. The target is £30-35m of savings per year, with a one-off cost of £60-65m.

Acquisitions

Two new acquisitions of US firms Modular Metal Fabricator and Wattco for up to £110m have failed to revive the market. So what does Smiths Group’s valuation look like?

Headline EPS of 105.5p gives us a price-to-earnings (P/E) ratio of 17.3 based on Monday’s closing price. That’s down to 16 on the day so far. Not bad?

Well, the statutory EPS figure of 72.3p makes it look less attractive. That puts the previous closing P/E of 25, falling to 23.4.

That’s the kind of valuation I might consider cheap for a company with good growth projections and hitting its targets. But maybe not for a company that simply failed to meet its goals and is on a cost-cutting plan.

Forecasts

That said, the forecasts look strong. And I doubt they will need to be scaled back much as a result of this latest one.

Analysts expect EPS to rise 20% by 2026, with the dividend rising 13%. This at a time when interest rates are likely to fall. And signs suggest that global economies are getting back on track.

Hmm, this could even make it a great time to buy cheap acquisitions in the US. I think engineering could have a few good years.

Comparisons

It may be helpful to compare the valuation with that of another British engineering company, a giant in the defence and aerospace industry. BAE Systems.

BAE is forecasting a P/E of 19 for this year. It could have more obvious defensive support, as EPS is expected to grow 25% between 2024 and 2026. But Smiths should also benefit.

The two valuations are not much different and the dividend yields are roughly the same.

I think Smiths shares, if you’re considering them, I would consider buying them now, even given the risk of a partial economic slowdown and the near-term need to cut costs.

However, when I look at the broader market, I see options that, for my money, better suit my strategy.