Smiths, Rotork gain as Goldman starts stocks at 'buy'

6th Jan 2017 08:42

(ShareCast News) - Manufacturing company Rotork and engineer Smiths Group got a boost on Friday as Goldman Sachs initiated coverage of both stocks at 'buy'.The bank set a 280p price target on actuator supplier Rotork, saying it expects to see trough earnings in 2016.Goldman's buy case is based on its forecast of 54% earnings growth by 2020 on oil & gas capex recovery and greater infrastructure spend, most notably in China and US water.In addition, the bank pointed out that after six years of declining returns, it expects return on invested capital to expand 2 percentage points per year through to 2020 as earnings recover.Finally, it highlighted the fact that consolidation is occurring within the flow control industry and said Rotork's multiple warrants an M&A premium.It gave Smiths Group a 1,670p price target, pointing to scope for the company to narrow its sector discount as the group returns to growth. It noted Smiths is currently trading at a 25% discount to the sector."We believe the following catalysts can drive multiple expansion and earnings growth: (1) Continued portfolio action through M&A and divestments of non-core assets, (2) more clarity on cost savings and new product launches, and (3) further pension de-risking."GS added that Smith is the biggest beneficiary of pound weakness among its UK coverage, with the US accounting for 47% of sales.At 0847 GMT, Rotork shares were up 4% to 259.60p and Smiths shares were 1.5% higher at 1,446p.