Industrial technologies conglomerate Smiths Group (LSE: SMIN) is one such FTSE 100 stock on my radar right now. Here, I’ll look at how it’s performing, its potential for unlocking value by divestments, and why I think its shares are undervalued by 50%+.

Hidden value highlighted

Smiths Group has made steady progress in sharpening its portfolio of businesses since a change of management in 2015. It caught my eye last September after news it had turned down an offer for its Smiths Medical division, reportedly in the region of £2.5bn-£2.8bn.

This highlights there may be considerable hidden value in the group. The table below shows some key numbers for its five divisions from its last financial year.

Smiths Medical accounted for 27.5% of group revenue and 26% of group underlying operating profit. How much might the whole group be worth? On the basis of that £2.5bn-£2.8bn reported offer — 26% of group operating profit — we might value the whole group at between £9.6bn and £10.8bn (2,425p to 2,728p per share). Yet its market capitalisation is currently just £6.5bn, with the shares trading at 1,640p.

A comparative valuation

Could Smiths really be worth so much more than its current valuation? Intertek, a highly rated FTSE 100 peer, has a similar underlying operating margin to Smiths. And I consider they share some broad drivers for long-term growth, as well as similar near-term forecast earnings growth rates, according to City analysts.

Smiths currently trades on 15.8 times forecast 12-month earnings, while Intertek’s multiple is 25.9. If Smiths were to be afforded the same multiple as Intertek, it would be valued at a little under £10.7bn (2,697p a share) — within, and at the top end of, the valuation range I derived from the rejected offer for Smiths Medical.

Unlocking the value

In November last year, two months after rejecting the offer, the company announced its “intention to separate Smiths Medical.” By March this year, this had become an “intention to pursue a demerger of the Smiths Medical business and separately list it in the UK.” Management said it anticipates completing the process during the first half of calendar 2020, subject to the approval of shareholders.

As my colleague Kevin Godbold has discussed, the separation into two companies promises to give each “greater and more-focused entrepreneurial drive.” As such, I expect shareholders to strongly approve of the demerger.

In the meantime, there’s always the possibility of another (higher) bid for Smiths Medical, or some other value-outing event, as “the board will continue to evaluate all opportunities for value maximisation as the process goes forward.”

Based on my valuation calculations, I think investors at today’s share price should enjoy strong returns, as events unfold. I expect significant value to be unlocked in due course. I rate the stock a ‘buy’.

The post I think this FTSE 100 share’s hidden value is set to be outed appeared first on The Twelfth Magpie.

More reading

• Finding FTSE 100 gems in the AI fog

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Intertek. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Software star

Shares in software specialists Kainos (LSE: KNOS) have exploded back above the 200p marker in Wednesday business, the release of an encouraging trading update driving shares 6% higher on the day.

Kainos advised that it expects trading to be in line with expectations for the year to March 2016, before noting that market conditions in the public sector continue to improve. The firm added that “this is expected to result in a further gradual increase in opportunities across government departments”.

On top of this, Kainos advised it had signed a five-year deal with InTouch Health, a “telehealth” services provider. The move will see the company’s Evolve Integrated Care SaaS platform used in 1,500 hospitals across the US and Europe.

Broker Barclays Capital expects earnings to surge 12% in the current year before advancing an extra 9% in fiscal 2017. A P/E rating of 20 times may not be cheap, but I believe Kainos deserves serious examination from those seeking exceptional growth potential.

Fossil fuel fears

Engineering play Smiths Group (LSE: SMIN) also furnished the market with fresh trading details on Wednesday, although the market greeted the release with much less fanfare. Smiths Group advised that revenues slipped 3% during July-January, to £1.37bn, a result that sent pre-tax profit 9% lower to £189m.  The company’s shares were recently 2% lower from Monday’s close.

A robust performance from the company’s medical and detection divisions helped Smiths Group broadly meet broker estimates, although the results highlighted the ongoing pressures for its John Crane oil and gas division — sales here tanked 13% in the first half of the year.

City consensus suggests that earnings should slip 14% in the year to July 2017, resulting in a P/E multiple of 14.7 times. Although this reading is more than respectable on paper, I reckon the prospect of further weakness across its oil-based operations — a segment responsible for roughly 30% of total sales — makes Smiths Group a risk too far at the current time.

Set to correct?

Diversified miner Anglo American (LSE: AAL) has been one of the FTSE’s major chargers since the start of February, the business gaining 75% in value during the period as commodity prices have rallied.

But returning fears over the strength of the global economy — and more specifically concerns over the impact of Chinese economic rebalancing — has seen raw material values, along with market appetite for Anglo American and its peers, begin to slip lower again in recent days. The company’s shares were last dealing 1% lower from Tuesday’s close.

I have long argued that the rapid ascent of the mining and energy sectors has been build on dodgy footing thanks to the chronic supply imbalances across major commodity markets.

And with expectations of a 58% earnings dip leaving Anglo American on an elevated P/E rating of 28.7 times, I reckon the stock is in danger of a harsh price correction.

The post Should You Snap Up Anglo American plc, Smiths Group plc & Kainos Group PLC Today? appeared first on The Twelfth Magpie.

More reading

• Finding FTSE 100 gems in the AI fog

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.