Morningstar | Smiths Group Noisy 2018 Results; Shares Attractive
Smiths Group's fiscal-year 2018 free cash flow came in 13% below our expectations, despite working capital improvements, with roughly one third of the miss due to currency changes and the rest from restructuring and pension related costs. Excluding these temporary pressures, revenue grew 2% and the underlying operating margin was stable. We are maintaining our medium-term forecasts for 4% and 7%, revenue and earnings growth, respectively, as well as our GBX 1,810 fair value estimate and narrow moat rating.The shares sold off moderately on the back of the market's disappointment in the medical division's revenue and earnings growth as well as slower-than-expected growth in the detection division. The medical division saw some one-off negative effects that should start to drop out in fiscal-year 2019. On the top line, a regulatory change forced the company to temporarily pull some products from the shelves in Europe until the products could be re-certified. We do not expect any issues with the re-certification process, which is already under way. We see the phasing back in of the products and launch of new products bringing in better results in the division next year.
In detection, the company saw some market share loss in the ports sub-segment which was down 43% year over year. While this is a big decline, we do not see it as material to the overall group. The ports sub-segment represents just 7% of the division revenue and just under 2% of the group's revenue. The core business of this division, airport screening equipment, increased revenue by 20%, including acquired growth from the Morpho acquisition.
John Crane, which is the third of the largest divisions and heavily exposed to the oil & gas market, posted good revenue growth (+5%), continuing to benefit from its late cycle mechanical seal products. New seal orders grew for the first time since the 2014 drop in the oil price. The division's operating margin was also solid up 10 basis points.
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