Thursday tips round-up: Smiths Group, Dignity

Shares of Smiths Group took a hit after the company announced that strength in sterling had knocked 8% off its operating profits for the year ended in July and that one of its five business units was below expectations – the detection division. That segment had already provoked a profit warning in 2012 but it turns out that its problems were more deep-seated and protracted than had been thought. In fact, they may take about five years to fix and 30m pounds in write-offs to close down unprofitable contracts.The main culprit are the reductions in defence budgets and an oversupply of equipment. The medical division was also a laggard in the aftermath of Obamacare, although it recovered in the second half. After an unexplained rise in the stock towards the start of the year the shares are now at the bottom of their recent trading range and “operational improvements can only continue at lagging divisions”; buy for the long-term says The Times´s Tempus.Debt-financed expansion plans often have a questionnable rationale behind them, but in the case of Dignity they seem to make sense. The company, which operates 698 funeral parlours and 39 crematoriums across the UK, has seen steady growth in both revenues and profits since its flotation in 2004. However, it still only provides funeral services for under a quarter of the deaths each year in the UK.Furthermore, the country has experienced a stable death rate of between 540,000 and 600,000 each year for more than half a century, although it will be at the lower end of that range in 2014. Hence, the business model of acquiring independent providers seems to be on a good footing. In parallel, management is carrying out a debt restructuring which will allow it to return 54m pounds in cash to shareholders. The stock, nonetheless, is currently trading on 15.6 times´ next year´s profits, which looks too rich, although the firm´s shares are well worth watching should a correction in the price offer an opportunity to step in, writes The Daily Telegraph´s Questor column. Smiths Group