ii view: Smith & Nephew beats annual sales record

Exposure to ageing populations and Emerging Markets. Should investors be stepping in?

Full-year and fourth-quarter results to 31 December 2019

• Fourth-quarter adjusted or trading revenue up 5.6% to $1.41 billion
• Full-year (FY) adjusted revenue up 4.4% to $5.14 billion
• FY adjusted operating profit up 4% to $1.17 billion
• Total FY dividend up 4% to 37.5 cents per share

2020 Guidance:

• Expects underlying revenue growth to be in the range of 3.5% to 4.5%
• Expects to deliver a trading profit margin at or slightly above 2019 levels

Chief executive Roland Diggelmann said:

"The improved underlying revenue growth of 4.4% in 2019, the best for several years, has propelled Group sales above $5 billion for the first time in Smith & Nephew's history. All franchises and regions meaningfully contributed to this record. 

"At the same time, we've continued investing to drive mid-term growth, both increasing our R&D spend, and also bringing in innovative technologies and expertise through acquisitions.

"For 2020, our focus is on sustaining the positive momentum and our strategic imperatives remain the right path to value creation. Within these, we will focus on delivering a consistent and excellent customer experience, maximising the impact from our increased investment in innovation, and continuing to improve our operational agility and efficiency."

ii round-up:

Medical devices maker, Smith & Nephew (LSE:SN.) reported quarterly sales which topped city estimates in these latest results.

Sales growth of 5% and 10% for its orthopaedics and sports medicine divisions propelled total fourth-quarter sales to 5.6%, exceeding analyst estimates of 4.5%. 

The share price jumped by more than 8% in morning UK trading, leading FTSE-100 gainers. 

Sales for the year reached a record $5.14 billion. Orthopaedic demand, including knee and hip replacements, generated the lion’s share of sales at over 40%. 

Sports medicine, which also covers Ear, Nose & Throat devices, accounted for 30% of sales, while its other advanced wound management business, which trailed group sales growth at 1.9%, provides the balance. 

Growth in Emerging Market sales of 16.6% far exceeded that of its biggest US region at 4.2%, with other established markets including Europe delivering a gain of 2.4%. 

Accompanying management guidance for 2020 proved in line with analyst expectations, although assumes the coronavirus outbreak normalises in the second quarter. 

ii view:

Under a new Chief Executive, appointed November 2019, Smith’s operating model has been revamped. It is also making bolt-on acquisitions to bring in new technologies and strengthen market-leading positions. It completed five purchases during 2019. 

For investors, and on a valuation basis, the company isn’t obviously cheap. A forward price earnings (PE) ratio of over 20 compares to a 10-year average of nearer 18. 

But global demographics and ageing populations offer investors a positive backdrop. Smith’s has also regularly found itself subject to takeover speculation, while this latest update arguably suggests that the new Chief Executive is worthy of investor patience. 

Positives: 

• Exposure to favourable demographics
• Progressive dividend policy, paying a dividend every year since 1937

Negatives:

• The coronavirus could hinder 2020 performance
• Transformations under previous leaders have begun well but faded

The average rating of stock market analysts:

Strong hold