Citi has reiterated its buy rating on Smiths Group (LSE:SMIN) following a sell-side breakfast with the engineering company's chief executive and chief financial officer, arguing the market's reaction to last week's earnings was overdone.
The bank said the outlook for second-half earnings is considerably more robust than the post-results share price decline implied, and that concerns about the impact of Middle East conflict on the group's John Crane division, which makes components for oil and gas facilities, are unlikely to translate into net negative consequences.
Citi acknowledged that John Crane could see some shifts in order patterns related to the conflict, but said the criticality of the division's components in keeping downstream oil facilities operational globally would limit any material damage.
The bank added that Smiths remains fundamentally undervalued even after the company announced two major disposals and a cash return to shareholders of around £2.5 billion, a programme that runs through 2027 and could provide some near-term share price support.
Citi said the more significant driver of any re-rating would ultimately be the company's ability to deliver on its targets for higher growth and improved margins.
In afternoon trading, the stock was up 3% at 2,324p.