View from City Road: Smiths may face a rough landing
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Your support makes all the difference.SMITHS Industries' performance is so dull it is impressive. Profits have come in pounds 10m either side of pounds 100m in each of the past five years, including last year when they were pounds 102.2m before tax.
This may be boring but it is a whole lot better than other aerospace suppliers. Worst of all has been British Aerospace, which has veered between profits of pounds 376m and losses of pounds 159m in the same period. Rolls-Royce, Lucas Industries and a host of others have also seen dramatic slumps.
Smith's performance is well appreciated in the City, where the shares rose 21p to 329p yesterday. They had already outperformed the rest of the market by 21 per cent in the previous 12 months. With the shares changing hands on 14 times' earnings - assuming no change this year - they are at their highest relative level since 1989. Can they hold on to this premium?
Roger Hurn, the chairman, is confident the company will return to a growth path for profits and earnings, which was presumably a reference to its performance in the 1980s rather than recently. Significantly he gave no timetable, though the total dividend was increased by 5 per cent to 11.25p.
The company will continue to control costs - last year's figures were stated after pounds 5.1m exceptional costs of redundancies and other 'downsizing' - which has been an important factor in its resilience thus far. The workforce has shrunk from 13,500 to 11,200 in the past five years. But this is not enough, without any upturn, to put the company back on the growth track.
More promisingly, Smiths is putting new emphasis on acquisitions in the medical and industrial divisions after the successful purchases of Flexible Technologies, HG Wallace and Intertech. It has pounds 120m cash and is being offered a huge number of companies to buy from distressed conglomerates.
It would, however, have to make large acquisitions to compensate for the likely downturn in aerospace. More than 60 per cent of group sales go to the aerospace industry, of which more than half is defence, much of it in the US. With Bill Clinton well ahead in the presidential polls, the future of this business must be in doubt. The civil business also looks weak, with Smiths forecasting a fall in output of Boeing 737s from 168 next year to 90 five years later.
In the short term the shares are a potential victim of a Clinton victory. Looking further ahead they risk losing some of their attractions, notwithstanding the management's record.
(Photograph omitted)
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