BNP Paribas announced on Wednesday that it has downgraded Smiths Group from "outperform" to "neutral," citing a deterioration in the oil and gas (O&G) market that undermines near-term prospects for the company despite the potential support of a large shareholder return program. The bank also reduced its sum-of-the-parts (SOTP) target price to 2,700p from 2,900p, a 7% cut, while the shares were trading around 2,600p - implying roughly 4% upside from that level.
The brokerage adjusted its earnings forecasts for the group, trimming EPS by 2-3% across the 2026-28 period. BNP Paribas specified a 3% downgrade to FY26 estimates and a 2% reduction to FY27, and noted that its organic growth expectations now sit 280 basis points below consensus.
BNP Paribas pointed to Rotork’s FY25 performance as the key trigger for its reassessment, considering Rotork the closest comparable for Smiths’ John Crane unit. Rotork reported a 1% organic sales decline in its O&G business in the second half of 2025 and guided for flat development in 2026 with a weighting to the second half of the year. That outcome prompted the bank to question consensus assumptions for John Crane, which have been stronger to date.
John Crane itself has already recorded what BNP Paribas describes as a "modest organic decline" in Q1 2026. Consensus forecasts, however, still anticipate 4.9% organic growth for the division in FY2026 - a projection that would require roughly 6.5% organic growth across Q2 to Q4 2026. BNP Paribas said it doubts that pace is realistic and signalled that earnings revisions are likely following Smiths’ H1 2026 results due next week.
On the specifics of its model, the bank reduced its organic sales assumption for John Crane from 2.3% to 1.8%. After revising its foreign exchange approach and folding in the DRC acquisition, BNP Paribas cut headline EBIT assumptions by 3-4%, citing a lack of scale, which fed through to the 2-3% EPS reduction. Applying unchanged multiples in its SOTP framework produces the new 2,700p target price.
The question of deploying proceeds from Smiths’ recent Detection divestment remains unresolved. Management is due to report on the use of GBP1.85bn of proceeds at the H1 2026 results scheduled for March 20. BNP Paribas said a tender buyback would be the most efficient mechanism to return cash to shareholders and would help sustain EPS growth after the divestment, but emphasised that the softer O&G outlook casts doubt on the company’s FY27 organic growth guidance of 5-7%.
"Whilst Smith remains inexpensive, negative earnings revisions are likely to temporarily weigh on sentiment," the brokerage added, signalling potential near-term pressure on the stock despite the buyback option.
Key points
- BNP Paribas downgraded Smiths Group to neutral and lowered its SOTP target price to 2,700p from 2,900p.
- EPS forecasts for 2026-28 were cut by 2-3%, with FY26 and FY27 estimates reduced by 3% and 2% respectively; the bank sits 280 basis points below consensus organic growth expectations.
- Rotork’s FY25 O&G results and guidance prompted the bank to reassess John Crane’s outlook; Smiths will report on GBP1.85bn of divestment proceeds at its H1 2026 results on March 20.
Risks and uncertainties
- O&G market weakness - The muted oil and gas outlook, signalled by Rotork’s performance, risks further downgrades to John Crane’s revenue and earnings, affecting industrial suppliers to the energy sector.
- Execution of capital return - The form and timing of any tender buyback or other deployment of GBP1.85bn proceeds are uncertain until the company’s H1 2026 disclosure, which could influence stock sentiment and EPS trajectory.
- Model sensitivity - Adjustments to FX assumptions and the inclusion of the DRC acquisition reduced headline EBIT by 3-4%; further model revisions or continued lack of scale could pressure forecasts and valuation.
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