ii view: Smith & Nephew is mending nicely but more care required

The Covid hit to sales is declining as surgery returns, but virus cases are again on an upward trajectory. 

Third-quarter trading update

• Revenue expected to be down 4%

ii round-up:

Medical devices maker Smith & Nephew (LSE:SN.) today outlined its expectations for a much improved 4% fall in third-quarter revenues, as levels of non-urgent surgery continued to recover under the pandemic. 

The single-digit revenue decline contrasts with a near-30% fall in the second quarter and a 47% drop suffered back in April, as hospitals almost globally prioritised halting the spread of coronavirus over procedures such as hip and knee replacements. 

Smith & Nephew shares rose by more than 2% in UK trading having fallen by around 15% year-to-date. Shares for rival wound care application maker ConvaTec Group (LSE:CTEC), originally spun out of phama company Bristol-Myers Squibb (NYSE:BMY), are down just under 10% in 2020.  

S&N makes orthopaedic devices including knee & hip replacements, sports joint repair applications including ear, nose & throat devices and advanced wound care and trauma applications.

All three franchises enjoyed significant recovery, although the improvement was strongest for its biggest division orthopaedics.

First-half results to the end of June saw Smith & Nephew reporting an operating loss of $5 million on a sales fall of 19% compared to a profit in the first half of 2019 of more than $400 million. 

However, unlike many other Covid-hit corporates, S&N has continued to pay a dividend, previously declaring an unchanged interim payment of 14.4 cents (11.2p) per share. It also paid a 2019 final dividend of 23.10 cents (18.66p).

It had $3.4 billion of committed cash facilities as of late June.  

ii view:

Orthopaedic devices account for around two-fifths of annual sales, sports joint repair applications including ear, nose & throat devices nearly a third. Advanced wound care and trauma applications make up the balance of sales. In 2019, the US generated around half of overall revenues, emerging markets & China just under 15% and the UK 4%.

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.  But Covid-19 has caused significant disruption to non-emergency surgery around the world, hitting the sale of its products. The pandemic follows what was a record 2019 year for sales of $5.14 billion.

For investors, global demographics and ageing populations offer a positive backdrop. Smith’s has also regularly found itself subject to takeover speculation. But uncertainty regarding earnings now persists, with a second spike in virus cases casting a shadow over the outlook. Broker estimates for a possible 2020 final dividend suggest a potential 25% cut. In all, balancing long-term expected growth against near-term uncertainty, shareholders may be content to sit tight. 

Positives: 

• Exposure to favourable demographics
• Dividend payments have continued

Negatives:

• Still offering no full-year financial estimates or guidance
• A second spike in the virus could further disrupt

The average rating of stock market analysts:

Strong hold

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