Smiths Group shares are -7.2% this morning as the engineering conglomerate reported an effective profits warning for its Medical division (FY revenue est. -2%).

The hit to share price comes as the company reported a broadly positive trading update, with group like-for-like revenues +3%, an anticipated growth acceleration in H2 2018 and positive performances for the rest of Smiths Group portfolio.

Today’s market reaction highlights the vagaries of the stock market and how even a single underperforming division can sour investor outlook for the otherwise healthy business.

That being said, shareholders have a right to be downbeat, as the decreased FY guidance for Smiths Medical comes on the back of several products being suspended ahead of new 2020 EU Medical Device Regulation, as well as termination of two contracts in the US. Smiths Medical represented 29.1% of group revenues and 33.2% of group operating profits at the half-year point, suggesting that the lower divisional guidance is bound to do damage to the overall group’s FY P&L statement.

While Smiths Group is trying to reassure investors by pointing to the fact that this is a one-off disruption, regulations is something entirely out of the company’s hands. With the post-Brexit landscape still unclear for UK businesses, the company’s certainty that it can avoid similar disruptions in the future should be taken with a pinch of salt.

So, while Smiths Medical has a healthy pipeline of new product launches (which led to positive guidance in its half-year report) and solid underlying growth prospects, making bets on future regulatory environment could be a tricky proposition.

Artjom Hatsaturjants, Research Analyst at Accendo Markets, 18 July 2018