Smiths Group Has Held Up Well, But Major Uncertainties Remain

I’ve had my ups and downs with Smiths Group (OTCPK:SMGZY) over the years. While I’ve liked the company’s decision to cull less competitive businesses, refocus on free cash flow, and reinvest in R&D, operating leverage has been wobbly and repeated attempts to sell the Medical business have gone nowhere due to what I believe is an inflated sense of the business’s value. So too today, while I think John Crane is an excellent business (seals, couplings, and bearings, primarily for oil/gas and industrial markets), I believe sell-side expectations for the business may be too high, and I don’t think the Street is going to love the “consistently inconsistent” results from Detection.

I do believe that Smiths may be undervalued here, but a great deal revolves around the details of the disposition of Medical. An IPO would likely be the best option, but will management accept what may be yet another rejection of their valuation of the business? Likewise, there are significant unknowns regarding taxation and how much debt the company may be able to attach to the business. Even so, I see an annualized total return potential in the high single-digits to low double-digits based upon various potential outcomes for Medical.

 

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Smiths Group Has Held Up Well, But Major Uncertainties Remain