Big losers: Smiths Group, RPC, Royal Mail

Smiths Group has been flying recently, while RPC and Royal Mail are used to selling pressure, but what's sending this Big Three south now. Graeme Evans reports.

The positive run for blue-chip conglomerate Smiths Group came to an abrupt halt today, leaving investors wondering whether the latest difficulty for its medical division is more than just a bump in the road.

Smiths, whose shares were trading at a record high a month ago, fell more than 8%. But it wasn't the only big stock in decline after a fall of 4% for plastics product company RPC Group and a post-update slide of 6% for Royal Mail.

For Smiths, investors had been sitting on a 17% share price improvement in 2018 until today's warning that its medical arm is facing a 2% decline in full-year revenues alongside stagnant margin growth.

The blame was directed at the new EU Medical Device Regulation, which has led to delays in re-certifying some of Smiths Medical's products ahead of 2020.

Medical, which is the group's biggest division and provides devices used during critical and intensive care, has endured a lumpy performance in recent years. In March, half-year revenues were down 5%.

Encouragingly for investors, however, the rest of the group continues to do well. Even including the Medical arm, today's underlying revenues growth of 3% in the 11 months to June 30 was better than the 2.3% forecast by Investec.

As well as the ongoing strong performances from John Crane, Detection, Interconnect and Flex-Tek, investors will be relieved that a potential tie-up involving the Medical arm and Nasdaq-listed ICU Medical is still on the table.

Analysts at Stifel described today's update as frustrating, with the updated guidance implying a 5% to 6% cut in headline consensus profit expectations.

However, this has not changed their positive view of the company overall or their 1,900p target price, which is based on a projected 2019 price earnings multiple of 18x to bring the stock into line with UK sector averages.

They wrote: "Looking ahead, we think that the solid progress at the rest of the group, hopes of an ICU transaction and sub-peer valuations at group level still give strong grounds for optimism on the medium-term outlook."

Prospects at RPC Group are little less clear due to ongoing uncertainty over future capital deployment.

The FTSE 250 stock told the company's AGM that opposing views among shareholders about the appropriate level of leverage were thwarting its ability to pursue some attractive opportunities for growth. As a result, it will have to prioritise cash generation and non-core disposals.

Analysts at Jefferies said there was likely to be disappointment among some shareholders that RPC did not announce another £100 million share buy-back.

They said: "We interpret the chairman’s comments to mean that RPC is looking to increase its available capital for attractive bolt-on M&A opportunities."

However, in the absence of capital deployment opportunities in the business, Jefferies went on to suggest that capital will be returned to shareholders, possibly via larger future share buybacks rather than dividends.

They also noted there was likely to be disappointment that organic sales growth of 2% for the first quarter was below the 2.8% 2018 run-rate.

Around 9% of RPC stock is on loan to short-sellers, amid fears that company may come under pressure due to the campaign against plastic packaging waste.

However, both Jefferies and Numis Securities see plenty of upside, with target prices of 1,050p and 1,130p respectively. Even though shares have rallied 19.5% since June up until today, Numis said the projected 2019 price earnings multiple of 10.3% offered a 30% valuation discount to packaging peers.

Meanwhile, the recent sell-off in shares of Royal Mail continued today after downgrades from Bernstein and JP Morgan Cazenove. While the shares are still up over the course of the year, they have succumbed to profit taking amid worries about the impact of new European data protection rules.

According to Richard Hunter, our head of markets, yesterday's trading update from Royal Mail showed the new financial year had started at a pedestrian pace.

Bernstein and JP Morgan agreed, cutting their target prices to 550p and 537p respectively, from 590p and 561p.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.