Investment Column: Smiths' security products can boost shares

Edited,James Moore@JimMooreJourno
Tuesday 02 November 2010 01:00


Our view: Buy

Share price: 1232p (+40p)

Smiths, the technology group, enjoyed steady gains on the stock market yesterday as investors woke up to what could be an unexpected boost to its bottom line. The interest was triggered by the recently foiled cargo bomb plot, in which explosive devices were posted in Yemen with the freight firms UPS and FedEx. The packages were intercepted, but not before one had been flown out of the Arabian peninsula; it made it to these shores and was intercepted at East Midlands Airport.

The saga has turned the spotlight on air freight channels. There are calls for a review of airport security as governments look at the way that cargo is scrutinised. Smiths, investors will recall, leads the market in designing and manufacturing scanners that zero in on explosives and the like. In fact, its Smiths Detection business, which accounts for around 20 per cent of group sales, commands an impressive 32 per cent market share in the transportation, critical infrastructure and ports and borders sectors, according to industry data quoted on its website. The shares went up as traders reasoned that greater scrutiny of air freight was likely to lead to an uptick in business for Smiths.

But does that make the company a longer-term buy? September's full-year figures were better than expected, although, looking ahead, the company did strike a note of caution on sales growth, which it said was likely to be hit by "the uncertain economic outlook and constraints on government spending". On the plus side, besides the opportunity presented by the potential for greater demand for the air freight market, Smiths is investing in higher-margin products, something which we think bodes well for the medium to long term. Moreover, at less than 13 times full-year earnings for 2011, the stock isn't exactly expensive. Buy.


Our view: Hold

Share price: 1876p (+21p)

Intertek, the testing company for products from food to toys, has proved to be a safe pair of hands for investors this year. After touching a lowly 1150p in early February, Intertek's shares have soared by more than 60 per cent since then. Yesterday, the company unveiled two small acquisitions that will bring Intertek new research and development services, as well as cross-selling opportunities.

The bigger deal of the two was an £8m cash purchase of Metoc, an engineering and environmental consultancy with 80 consultants in Hampshire, Cardiff and Dundee. With clients in Europe, North and South America, the Middle East and Africa, Metoc provides consultancy services to companies at the concept, construction and operational stage of new wind, wave, oil, gas, solar and hydroelectric plants.

On a smaller scale, Intertek – which has more than 1,000 laboratories in more than 100 countries – will pay up to £1m for Profitech, which provides data modelling research for the oil and gas industry. While City analysts praised the two deals, which should contribute to the company's onward march, investors should be wary of the lofty share price before testing them out.

The shares now trade on a 2011 multiple of 21.2 times forecast earnings. Good company, but at that price we're not going to experiment further. Hold.


Our view: Buy

Share price: 132.2p (+2.3p)

Xchanging has been under a cloud since a worrying debate about its accounting policies earlier this year. Boss David Andrews responded assertively, calling in accountants for a "re-audit". Trouble is, any company involved in outsourcing (Xchanging handles business processes such as invoices and payroll) starts to scare investors when accounting issues are raised. Just look at what happened with Connaught.

And so, since the rumours started, Xchanging shares have fallen 40 per cent, putting the company on a potentially compelling valuation of just 7.3 times 2010 earnings. Peers such as Capita trade on 16 times.

We're sceptical about outsourcing as a business – companies do it, so do government departments, claiming it will save costs. But what all too often happens is that badly written contracts end up with one side or another in court, while the service deteriorates. However, while Xchanging's statement was cautious on the outlook, it rang no alarm bells. The group continues to win contracts and is too cheap at the current price. So buy.

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