This FTSE 100 stock is down 20% in six months. Is it an opportunity that’s too good to miss?

A brown bear sitting on a rock

Over the past few decades, engineering group Smiths(LSE: SMIN) has earned itself a reputation as one of the UK’s premier industrial companies. But it’s recently fallen on hard times. 

The group, which produces everything from replacement knees to airport scanners and industrial pumping equipment, has seen the value of its shares fall by 20%, excluding dividends, over the past six months, following a profit warning.

Growth halt 

At the end of September, Smiths told the market that fiscal full-year sales had declined 2%, while pre-tax profits were down 28%. Investors were also less than impressed by management’s prediction that sales for this financial year would grow by “at least” 2%. Although shareholders had expected more, sales growth has averaged just 0.7% for the past five years. 

Nevertheless, despite the firm’s outlook, I believe that this could be a fantastic opportunity for long term investors.

After recent declines, shares in the industrial conglomerate are now changing hands for just 13.2 times forward earnings. That’s not cheap, but it’s significantly below the five-year average of 16.9. As well as being cheap compared to its historical average, I believe recent investor disappointment will push management into action to try and improve growth. 

Analysts are speculating a breakup or sale could be on the cards, potentially unlocking billions in extra value. And while shareholders are waiting for a value-crystallising event to emerge, they can pocket a dividend yield of 3.6%.

So, after considering the firm’s historically-cheap valuation and level of income on offer, I reckon this could be an opportunity that’s too good to miss. 

Upcoming buyout? 

Another company that’s also currently the target of bid speculation is Equiniti (LSE: EQN)

It’s been reported that the Chicago-based private equity shop GTCR is considering making a £1bn offer for the share registrar, with some big names helping put together a proposal. 

As of yet, no concrete offer has been announced, although I can see why private equity might be attracted to this business. Equiniti dominates the share-registrar business in the UK (it provides share registration for around half the FTSE 100) and has strong relationships with many pension funds, investment funds and banks. These factors all mean that the enterprise has an exceptional competitive advantage and, with this being the case, I think shares in the company are currently undervalued, changing hands for just under 12.8 times forward earnings.

With earnings per share (EPS) set to expand at a mid-teens rate for the next two years, I reckon the stock deserves a growth premium. For income investors, there’s also a 2.5% dividend yield on offer. As the payout is covered 3.2 times by EPS, there’s lots of scope for further growth.

Considering these numbers, I think that even if a bid for Equiniti doesn’t emerge, as a stand-alone investment, this company has many attractive qualities. And with its leading position in the market, the group should remain relevant for many years to come, producing steady returns for investors through a combination of both income and growth.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Equiniti. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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