The Investment column: Smiths Industries is flying high

Smiths Industries, under its veteran boss Sir Roger Hurn, has been one of the quiet success stories of British manufacturing. The shares have all but doubled over the past five years as the group's three- legged formula based on aerospace, medical devices and industrial products ranging from Vent-Axia fans to flexible hoses has borne fruit. But it was hardly propitious that yesterday's results, the first since Keith Butler-Wheelhouse took over as chief executive last November, should be marked by a 10.5p drop in the shares to 785.5p.

That reaction by the market looked a little perverse, given the good news that Smiths had to tell. Stripping out pounds 4m of property gains, the 15 per cent rise in underlying pre-tax profits to pounds 80.2m for the six months to 1 February was better than some expectations.

Certainly there have been hiccups in the latest period. Profits only crept ahead to pounds 31.9m in medical systems. It seems the results would have gone backwards but for acquisitions, giving credence to those who have long argued that the business's 20 per cent plus margins are unsustainable. Certainly Mr Butler-Wheelhouse was suggesting yesterday that margins may have plateaued for now.

But Smiths' UK-based medical equipment and disposable devices operations, currently struggling against a strong pound, will not have to battle currency factors for ever. There should be no repeat either of the second-quarter sales hiatus caused by the introduction of the US Deltec operation's new Prizm pump for the automatic delivery of medicines to patients.

Even so, the real story at Smiths is in aerospace. The jump in profits from pounds 17.2m to pounds 22.9m caught some observers off guard yesterday. Better still, the group was clearly signalling that the current boom in civil orders from Boeing, its main customer, is likely to be matched on the military side, which represents 60 per cent of the aerospace business. Meanwhile, every day seems to bring more good news on Boeing work, already showing a rise of up to 50 per cent. That could be worth a highly profitable pounds 50m addition to turnover by the end of the century.

Acquisitions are likely to continue to feature at Smiths, which reckons it has a war chest of up to pounds 400m before it needs to approach shareholders. Currency could shave profits by pounds 8m this year, but Hoare Govett has upgraded its full-year forecast to pounds 186m, putting the shares on a forward multiple of 19. Fair value.