Smiths at an inflection point

This was borne out in the appraisal of the underperforming medical division (29 per cent of group revenues), which, supported by the launch of 11 new products, “made significant progress on its return to growth with underlying revenue improving to be flat year over the year”. In truth, we’re being a little churlish; it was apparent that management had responded to a fall-away in demand for the group’s medical supply products at the time of the 2017 interims, but recovery won’t be achieved overnight. Accept that the division is being repositioned to tap high-growth regions (a 7 per cent revenue increase through the period), while taking account of the substantial R&D allocations and front-loaded development costs, and you could argue that a 50 basis point decline in capital returns (ROCE) represents a creditable result. Sales have also been constricted because of launch delays, but perhaps we shouldn’t be surprised (let alone alarmed) given the ambitious roll-out.

But if the medical division was in need of a restorative, you would imagine there was no option for the John Crane business unit beyond invasive surgery. The business, which provides engineering products for the global energy and process markets (chemicals, pharma, environmental etc), has struggled as energy capital expenditure budgets headed south following the 2015 oil price slump. Management duly looked to optimise profitability by hiving off assets – including John Crane Bearings in the period under review – while eliminating exposure to upstream oil and gas markets. Again, recovery is likely to be a drawn-out affair, but a 5 per cent uptick in underlying operating profit, together with a 210-basis point hike in ROCE, suggests remedial measures are having the desired effect.

Bloomberg consensus gives July 2018 pre-tax profits of £529m, with adjusted EPS of 95.5p, rising to £567m and 106p in 2019.