Butler-Wheelhouse is cruising comfortably at Smiths; The Investment Column

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The Independent Online
Keith Butler-Wheelhouse knows he is a lucky man. The former boss at Saab cars takes the controls as chief executive of Smiths Industries next month, safe in the knowledge that the avionics supplier looks set fair for at least another few years of good growth.

Under his predecessor, Sir Roger Hurn, Smiths has been transformed from a highly cyclical civilian and military aerospace group into three separately run divisions, including medical equipment and industrial products such as ventilation fans and flexible tubing.

The unfashionable move - the antithesis of the demerger craze sweeping the City - has served investors well, the shares having outperformed a soaring stock market by more than a quarter in the past year alone.

Smiths' track record on acquisitions is second to none. Strong cashflow has enabled it to splash out pounds 475m over six years, expanding its medical and industrial products activities without tapping shareholders for money.

Last year was no exception as pounds 98m was spent buying three bolt-on businesses, including Level 1, a US manufacturer of blood and fluid-warming systems.

These deals helped propel profits before one-off items to pounds 165m, up 19 per cent, in the year to 3 August.

Though growth has been supercharged by acquisitions, organic growth remained strong, with underlying profits up 14 per cent as trading conditions improved across the board.

In aerospace, still the largest division by sales if only accounting for just over a quarter of profits, the main driver of growth is the increased profitability of the world's airlines and their need to replace old planes.

Smiths expects Boeing, its biggest customer, to almost double the number of its short-haul 737 aircraft produced from 76 this year to 160 by the end of the decade. Smiths receives up to $450,000 for supplying each plane with electrical equipment. It is a similar picture with Boeing's new generation of wide-bodied 777 jets, where production is set to jump from 32 this year to 70 by 1999.

The outlook on the military side is more mixed, with the German government dragging its feet over the Eurofigher project. Orders for fighter planes from the US Air Force dried up completely this year for the first time since World War II but are set to resume next year.

Despite the acquisition spree, the balance sheet is virtually debt-free and more deals are promised.

Panmure Gordon is expecting pre-tax profits of pounds 190m for the current year and pounds 215m in 1998. With the shares up 12p to 803.5p, that implies a p/e ratio falling from 19 to 17. A fair rating for a quality stock.

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