Monthly Archives: February 2017

Stocks in Focus: Smiths Group

This week I am taking a closer look at the global technology company, Smiths Group, 18 months on from the change of its top management team. The group operates across five separate divisions that provide a range of products and services including mechanical seals to the energy services sector, speciality medical devices for hospitals, electrical components for power applications and devices for detecting explosives and other threats.

With several parts of the business operating in difficult sectors and a meaningful exposure to the oil and gas industry, Smiths Group has certainly had a difficult few years with declining sales and very little organic growth.

Following a profit warning in 2014, Smiths Group welcomed their new CEO, Mr Reynolds Smith (previously of GKN) to the helm in September 2015.  Along with a new CFO, Mr O’Shea, the new team brought with them hopes of reenergising the business without the need to split up the various divisions.  Management took this opportunity to conduct a thorough strategic review which has resulted in a new focus on improving cash generation, margin improvements and using the combined strength of the Group in order to drive ongoing growth.

So has the new strategy paid off? Eighteen months on and already there have been encouraging signs of simplifying the business with sales of several of the non-core and loss-making assets to free up cash to invest in key growth areas. The company has performed reasonably well since the change of management and has reported revenue growth across four out of five divisions throughout 2016, although there was a decline for the group as a whole. Despite these initial improvements, the business continues to face considerable challenges due to ongoing concerns about government spending and the outlook for the oil and gas industry.


Stocks in Focus: Tesco

This week I am looking at Tesco following the surprise announcement on Friday 27 January to merge with Booker subject to approval from competition authorities. Booker shareholders will receive 0.861 shares in Tesco and 42.6p for every share they hold. This values the company at 205.3p, a 12% premium to the previous close and 24% premium to the average share price for the past three months.

Booker is primarily a food wholesaler, selling to food retailers as well as catering and small businesses. The company has grown under the guidance of CEO Charles Wilson from a £0.4bn market capitalisation in 2007 to £3.7bn today.

The wholesale market that Booker operates in is distinctly different to the retail market of Tesco, however there are obvious similarities and synergies to be exploited. The merger is estimated to create £200m of synergies for the combined company. It will also reduce Tesco’s overall financial leverage due to Booker’s net cash position and may boost Tesco’s overall growth due to the higher growth business of Booker.

The food retail sector remains highly competitive. Tesco has focused on its core business, selling its non-core businesses such as Giraffe, Blinkbox and exiting overseas operations. The merger seems to contradict this emphasis on the core business, particularly since Tesco has suggested there is a large amount of self-help it can implement, targeting ambitious margin improvement over the next three years. It is too soon to say whether such a merger will deliver value to shareholders but it is clear, with this deal and Sainsbury’s purchase of Argos last year in mind, that the main supermarkets are looking to take a different approach to improve returns.