Midas Extra share tips: Smiths Group and PHC

By This Is Money
Updated:

 

There may be more than a week until Christmas but many people in the City are already winding down. The stockmarket is extremely quiet, with precious little trading activity taking place. Nervousness persists about 2009 and this is exacerbated by the steady stream of bad news from companies reporting falling sales, falling profits and falling dividends. Companies making products that are virtually indispensable are almost bound to do better over the coming months. Similarly companies that have more than one string to their bow. One such business is Smiths Group.

Smiths Group

Smiths is rather an old-fashioned company. Not only has it been around for more than 150 years but it has five distinct divisions, each selling quite different products to quite different customers.

In other words, Smiths is rather like a conglomerate. Back in the 1980s, conglomerates were the height of fashion. Then they fell out of favour and today there are precious few left. But in the current environment, the conglomerate has some decided attractions - even if one part of the business suffers, it is unlikely that every part will.

And Smiths Group is particularly attractive, because the bulk of its profits come from sectors that should prove resilient even in a recessionary climate.

The biggest part of the company is Smiths Medical, which makes breathing tubes to help hospital patients breathe during and after operations. The business also makes safety devices for needles to prevent injuries and reduce the chance of patients and nurses catching infections.

The second largest division is John Crane, which makes seals and other technical equipment predominantly for oil and gas companies. Then there is Smiths Detection, which makes X-ray machines for use at airports, sea ports and borders. Some of these machines are extraordinarily accomplished, capable of spotting tiny amounts of explosives or drugs on passengers, their luggage or their cars.

The last two businesses are Smiths Interconnect, which is involved in wireless technology used by the defence industry and mobile phone companies, and Flextek, which makes tubes and hoses for everything from vacuum cleaners to industrial air conditioning units.

Overall, the group made pre-tax profits of £380 million for the year to 31 July, up 10 per cent from the year before. Sales rose 7 per cent to £2.3 billion and the company expressed some confidence in the future.

A trading statement released last month acknowledged that global economic conditions are horribly tough but said profit expectations should be met. This was reassuring, as analysts are forecasting profits of around £415 million for the year to July 2009.

A year ago, almost to the day, Smiths acquired a new chief executive, Philip Bowman, who ran Allied Domecq before it was sold to Pernod Ricard and Scottish Power before it was sold to the Spanish energy group Iberdrola. Bowman is well-respected in the City and he has already made several important changes to Smiths. The five divisions have been given real focus and direction and they have each been set sales and profits targets under a two-year plan, designed to boost growth and improve efficiency.

Bowman is also moving the company out of its large, unwieldy head office in Finchley, North London, devolving more responsibility to divisional heads and moving them closer to their respective customer bases. This all sounds eminently sensible and supporters hope it will enable Smiths to fulfil its potential. The medical business has had problems in the past but these have been dealt with so it should deliver good growth in the future.

Smiths Detection is expanding fast and Smiths Interconnect is a reasonably solid business too. John Crane is holding up well and Flextek is the smallest division of the group so its fortunes are less important than the rest. The company also derives a large proportion of earnings in dollars so it will benefit from the US currency's strength.

Midas verdict: Smiths Group was trading at 1015p in early September. Now the shares are changing hands at 876p. This company has been around for a long while and it should prove its credentials over the coming years. Brokers believe the stock is worth at least 1100p and the dividend looks secure too. Buy.

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UPDATE: Plant Health Care

Plant Health Care is responsible for two products that could revolutionise the way crops are grown. The first is harpin, which makes plants grow faster and repels insects by activating plants' intrinsic ability to protect themselves.

US seed giant Monsanto started testing harpin a couple of years ago and yesterday, the group announced it was going to start using the product from next year. Plant Health Care shares shot up nearly 25 per cent on the news, to 225p.

The response made sense. Monsanto is the largest seed company in the world and brokers believe the harpin deal could, in time, generate profits of around £15 million a year for PHC.

The company's other product, myconate, encourages plant roots to grow so they absorb more nutrients and become larger and stronger. It is being tested by Bayer, the European healthcare and agricultural giant.

PHC joined Aim in 2004 and it has been loss-making ever since, as it has focused on developing its products and making them commercially attractive. The Monsanto deal shows the approach is working and the company should start making significant profits from 2010.

Midas verdict: Midas first recommended PHC in April 2007, when the shares were 269p. They climbed to more than 400p this summer but market disaffection with Aim stocks hurt the company badly and the shares slumped to 160p before yesterday's announcement. There has been no bad news from this business and the merits of its products are undisputed. Investors should hold onto their shares and wait for market sentiment to turn. Hold.

• The Midas Extra column is written by Joanne Hart, Investments Editor, Financial Mail on Sunday

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