ii view: Smith & Nephew raises revenue guidance

Emerging markets and global sports medicine lead sales at orthopaedics group Smith & Nephew.

Second-quarter results ending 29 June 2019

• Revenue up 3.1% to $1.28 billion
• Operating profit up 12.6% to $419 million
• Dividend payment up 2.9% to 14.4 cents per share

Chief executive Namal Nawana said:

"The positive momentum across the business globally in the first half of 2019 has led us to upgrade our full year revenue growth guidance. Organic revenue growth has been solid across all three franchises, with strong performance in Emerging Markets and global Sports Medicine. At the same time, we expanded our margin. We are delivering on our commitments to accelerate revenue growth, improve profitability and importantly make investments that support the long-term success of Smith & Nephew."

ii round-up:

Employing over 16,000 employees, Smith & Nephew (LSE:SN.) designs, makes and sells medical devices. 

It operates over three divisions. Orthopaedics makes knee and hip replacements, generating the lion's share of revenues at around 45%. Sports Medicine provides joint repair and arthroscopic technologies, while Advanced Wound Management completes the portfolio. 

The US provides is its biggest market at nearly half of sales, with Australia, Canada, Europe, Japan and New Zealand all important destinations. Emerging markets account for nearly one-fifth of sales. 

Smith & Nephew has been making acquisitions that bring in new technologies to strengthen market-leading positions across its businesses, which it hopes will speed up growth. For example, In June, it bought Brainlab orthopaedics, which provides surgeons with digital workflow tools. Used in more than 500 hospitals worldwide, the technology helps maximise precision. 

The company reported broadly positive progress in these second-quarter results. Sales growth was at the upper end of expectations with an increase in full-year sales guidance a clear positive. 

The share price rose by over 1% in early UK stock market trading. 

ii view:

On a valuation basis, S&N shares do not look obviously cheap, standing on a forward price earnings (PE) ratio of over 20 compared to a three and 10-year average of less than 20. However, global demographics and ageing populations offer investors a positive backdrop, and Smith & Nephew has regularly found itself subject to takeover speculation. Making bolt-on acquisitions to strengthen leadership positions, we believe, looks sensible, and this sales upgrade demonstrates the strategy of accelerating top-line growth is working. 

Positives: 

• Increased full year revenue growth guidance
• S&N has a progressive dividend policy and has paid a dividend every year since 1937

Negatives:

• Sales across Europe, Canada, Japan, Australia and New Zealand fell by 6.2%
• Transformation programmes under previous managements have begun well but faded

The average rating of stock market analysts:

Hold