Interactive Investor

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

1st October 2020 11:13

Keith Bowman from interactive investor

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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

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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