The Investment Column: Smiths a victim of its success

Smiths Industries has done it again. Shrugging off a pounds 12m currency hit and reshuffle of its top management team, it unveiled another impressive set of results. Underlying earnings rose 16 per cent to pounds 192m for the year to August and dividends were one-tenth up at 17.9p, the 27th year in a row it has increased pay-outs.

Smiths benefited from the upturn in the aerospace market which followed a sharp pick-up in aircraft orders on the back of booming airline passenger numbers. Its defence order book also looks assured. Future profits should be bolstered by Smiths' US contract to supply planes for its new fleet of aircraft carriers. It is also in line for hundreds of millions of pounds of work from the Eurofighter project, which is finally getting off the ground.

Not that the company depends on aerospace. Its industrial division has proved a solid performer. And Graseby, the latest pounds 136m addition to its medical division, looks like a great buy.

However, despite the good news, Smiths shares fell 33p to 942.5p.

The company has become a victim of its own success. Smiths' margins are already very healthy and there is little scope for significant improvement. And it can no longer rely on small acquisitions making a significant impact on its share price, however good the deal. Investors are now expecting a big purchase and the absence of a deal with these results explains the market's disappointment.

Smiths certainly has the financial firepower to make a significant purchase and is eyeing up plenty of targets, including a chunk of BOC's Ohmeda medical business. However, as deals get bigger, they usually become more expensive.

Smiths now has to prove it can grow its top line as reliably as it has been able to build up margins.

NatWest forecasts current year profits of pounds 209.1m, putting the shares on a prospective ratio of 20. Hold.