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SMITHS GROUP

SMITHS GROUP – READYING ITSELF FOR BREAK-UP?
By Howard Wheeldon, Senior Strategist at BGC Partners

29 Jun 11. Invest in the business or sell it – that question appears to once again be troubling some investors in the engineering technology company Smith Group. Up another 24p to 1173p in mid morning trade Wednesday the shares of Smiths have been ignited on suggestions by CEO Philip Bowman in New York yesterday that the company intends to accelerate investment aimed at driving top line growth over the medium term. If this turn out to be true then it is great news that some would say was long overdue. Given low levels of media and press interest generally accorded Smiths when the company announces full year and interim results one is pleased to see that yesterdays’ announcement from the CEO did at least bring about a positive response from the investment community. So it should have too as this is after all a FTSE100 company that we are talking about albeit one that has over more years than not over the past thirty that I have known it too often sought to keep itself to itself. Thereby hangs a problem for Smiths Group in 2011 – unknown by far too many and seemingly misunderstood by the rest!

Yesterday’s announcement from Mr. Bowman should not be seen as being just a hint on potential acquisition intention. Equally it must be seen as being about an intention for portfolio shift meaning divestments as well. On that score it is now well over four years since Smiths Group sold its former aerospace division to GE for £2.4bn. At the same time as disposing of aerospace activities to GE the company announced that it had also signed a letter of intent with GE to create a detection joint venture between the then fast growing Smiths Detection businesses and those of GE Security’s Homeland Protection business. The proposal was that a joint venture would be owned on the basis of Smiths having a 64% share and GE 36%. In the event Smiths aborted the idea preferring to go it alone – a decision that through the following two or three years looked very sound. As a lead technology developer and manufacturer of sensors that detect and identify explosives, chemical and biological agents, weapons and contraband and that was born out of internal investment within Smith Group the detection business has been subsequently expanded through acquisition. Although far from being mature as the economic situation in some customer countries has worsened the detection business has shown some sign of stagnating. The point though is that the detection business with its advanced technology security solutions that also include x-ray imaging systems, millimetre-wave technology, and software supply remains a great business to be in.

Smiths largest business today is Medical – a world leader in the design, manufacturer and supply of medical devices ranging across airways management and ventilation, pain management, infusion and drainage systems, monitoring, tracheotomy tubes and vascular access under names such as Portex, Medex, Deltec, Wallace, Graseby and others. While a global business such as this can fluctuate in terms of performance maybe through changes in elective surgery or change currencies they remain great cash generative businesses. Indeed it is fair to say that Smiths great success over the past thirty years is down to two factors in my view – strong cash generation and the ability to grow businesses right from scratch.

The future cannot always be based on the past though and with shareholders having somewhat less patience with regard to investment in the business today than they one had and whilst they demand that risks are reduced does mean that the job of growing earnings gets tougher for a company like Smiths. Back in the 1980’s and 1990’s for instance when the then Smiths Industries was being run by the brilliant Roger Hurn investors would generally be content that the prospects to keep growing through internal investment in new ideas,

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