Should You Buy Smiths Group?

LONDON -- General industrials firm Smiths Group  (LSE: SMIN  )  has enjoyed a stellar share-price run dating back to the end of last year, rising 28% since mid-November to current 20-month highs around 1,300 pence.

Although the prospect of fresh macroeconomic turbulence could weigh on this cyclical stock, I reckon Smiths Group should continue to make progress owing to the quality of its businesses in red-hot end markets.

Strength continues across all divisions
Smiths Group's last interims in November announced underlying revenues had climbed across all divisions in the three months concluding Nov. 3. This performance helped to drive underlying headline operating profit higher from the corresponding 2011 period.

The company seems to be positioned well within excellent growth sectors, which bodes well for future earnings -- its John Crane arm provides components for the oil, gas, and mining industries, while its medical division builds single-use products and equipment used in health-care procedures.

And business at Smith Group's detection arm, which builds chemical, trace, and X-ray equipment for military and commercial use, is ramping up the pace at an encouraging rate. The order book continues to grow considerably, and the first shipments from the division's new manufacturing facility in Malaysia were completed last year.

Earnings momentum expected to roll on
City estimates put earnings-per-share growth for the year ending July 2013 at 3% to 95 pence. A 7% advance to 101 pence per share is then expected in 2014.

The rocketing share price has seen the company's earnings multiple jump ahead of the average forward P/E rating of 10.6 for the general industrials sector. Smiths Group shares currently change hands on readings of 13.7 and 12.8 for 2013 and 2014, correspondingly. But I reckon the quality of the firm's businesses vs. its peers justifies this premium.

Although the effect of budgetary cutbacks in the U.S. could dent turnover at Smith Group's detection and medical arms, I believe the steady progress made across all its divisions should more than compensate for any weakness. Indeed, the group's extensive cost-cutting plan should help guard earnings even in the event of deteriorating revenues.

Smiths Group is expected to increase its dividend over the next two years, to 39.9 pence per share this year and 42.3 pence per share in 2014 to represent yields of 3.1% and 3.3%, respectively, for these years. Critically, these payouts are protected by decent coverage of 2.4 during the period, which should provide a shield against any balance sheet pressure.

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