Interactive Investor

ii view: results give Smith & Nephew shares a big boost

Challenges remain but is the worst of the pandemic now behind this knee and hip replacement maker?

22nd February 2022 14:58

Keith Bowman from interactive investor

Challenges remain but is the worst of the pandemic now behind this knee and hip replacement maker? 

Full-year results to 31 December

  • Total group revenue up 14.3% to $5.21 billion
  • Operating profit doubled to $593 million
  • Final dividend of 23.1 US cents per share
  • Total full-year dividend unchanged at 37.5 US cents per share

Guidance:

  • Targeting consistent 4% to 6% underlying revenue growth by 2024
  • Targeting a trading profit margin of at least 21% by 2024 

Chief executive Roland Diggelmann said:

"We finished 2021 with a solid fourth quarter, despite nearly a week less trading than in 2020 and the impact of Omicron, which affected the typical quarter-end pick up in average daily sales.

"Looking to the future, we have set out our new Strategy for Growth with an ambition to transform to a structurally higher growth company, including clear medium-term revenue and trading profit margin targets.”

ii round-up:

Smith & Nephew (LSE:SN.) today detailed ambitious growth plans as it reported a doubling in profit for the full year to December. 

The medical device maker, which also announced a new chief executive, reported sales above pre-Covid levels for parts of the business along with a significant improvement in profit margin because of a strong focus on costs.

Smith & Nephew shares rallied by more than 4% in UK trading, although remain down by more than 10% over the last year. Shares for Covid-19 vaccine maker AstraZeneca (LSE:AZN) are up by more than a quarter in that time, while the FTSE 100 has climbed by just over 13%. 

Smith’s products include knee and hip replacements, procedures for which were badly hit at the peak of the pandemic as hospital cancelled operations in favour of treating Covid patients. 

Group revenues for 2021 rose 14.3% to $5.21 billion compared to a pandemic hit $4.56 billion in 2020. Sales for its sports medicine; ear, nose and throat (ENT) and advanced wound management products came in ahead of pre-pandemic levels. Sales for orthopaedic devices remained hindered by supply chain constraints. 

Dr Deepak Nath, formerly of Siemens Healthineers, becomes chief executive from 1 April. His time at Siemens has been spent pursuing growth and profit margin expansion through improved execution and a culture focused on results.

The FTSE 100 medical device maker is now targeting both consistent underlying revenue growth of between 4% and 6% through to 2024 and a trading profit margin of at least 21%.    

ii view:

Founded in Hull in 1856, Smith & Nephew today operates in more than 100 countries, employing around 18,000. Orthopaedics generated its biggest slug of sales during this latest financial year at just over two-fifths, with the balance split relatively evenly between sports medicine & ENT and advance wound care management. Knee replacements top its product sales, followed by sports medicine joint repair.  

For investors, outlook uncertainty regarding both the pandemic and supply chain challenges cannot be forgotten. Costs for businesses generally are rising while the dividend has been left unchanged. 

More favourably, a recovery from the pandemic is evident, with the company delivering growth in fourth-quarter sales. A new CEO could inject further rigour into the company’s growth strategy, while ageing populations will want its orthopaedic products. In all, and while some caution looks sensible, a consensus analyst estimate of fair value at just under £15 per share appears to give room for longer-term optimism.    

Positives: 

  • Both product and geographical diversification
  • Exposure to favourable demographics

Negatives:

  • Ongoing pandemic outlook uncertainty
  • Subject to currency headwinds

The average rating of stock market analysts:

Strong hold

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