Numis Securities has downgraded its rating for Smiths Group PLC (LON:SMIN) to ‘reduce’ from ‘add’ in the wake of first-half results from the x-ray machine maker on Friday.
In a note to clients, the City broker’s analysts said: “The results are a little disappointing and whilst we see some of the softness, ie more investment in Medical as arguably positive, the overall tenure is still not generating organic growth.”
READ: Smiths Group shares drop as engineer’s first-half profit, revenue fall, but 2018 guidance reiterated
They added: “The markets have given the management team much credence but until more tangible results the shares on the current rating look a little rich.”
The analysts pointed out that Smith Group’s John Crane business saw organic growth of 4% and margins up 50 basis points (bps) to 21.3% as oil & gas markets started to improve.
But they noted that the FTSE 100-listed firm’s medical division saw flat organic growth while margins dropped 290 bps to 18.1% with management citing higher new product launch costs, R&D spend and restructuring costs now being taken above the line.
But the analysts noted that said Smiths Group’s full-year outlook remains unchanged on a pre-currency basis, and encouragingly it is expecting good growth in Medical and Detection in the second half.
They also pointed out that the business will be a significant beneficiary from US tax changes which they have already put through to assist 2019 earnings per share.
The Numis analysts maintained a price target of 1,380p on Smiths Group shares, which in early afternoon trading were off opening lows but still down 4.8% at 1,462.5p.