ii view: Smith & Nephew shares on the mend despite surgery slump

Despite a near one-third drop in sales, monthly trends have been improving as Covid restrictions lift. 

Second-quarter trading update

• Adjusted or underlying revenue expected to fall by 29%
• First-half trading profit margin expected to be substantially down on last year

ii round-up:

Medical devices maker Smith & Nephew (LSE:SN.) today outlined its expectations for a near one-third drop in second-quarter sales given the disruptive impact of Covid-19 on day-to-day corrective surgery. 

The profit margin for the first-half is also expected to be substantially lower.

But a recover in sales has been seen as coronavirus restrictions have eased in many parts of the world and a return to some non-emergency surgery was made.

Smith & Nephew shares rallied by more than 5% in afternoon UK trading having fallen by around 18% year-to-date. Shares of diversified industrial, Smiths Group (LSE:SMIN), which includes a medical devices maker among its divisions, is down by a similar amount in 2020. 

Having fallen by 47% in April, sales improved to a fall of 27% in May and down by around 12% in June. 

S&N makes orthopaedic devices including knee & hip replacements, generating around 40% of annual sales, and sports joint repair applications including ear, nose & throat devices, accounting for around 30% of sales. Finally, it also sells advanced wound care and trauma applications.

While both orthopaedics and sports repair surgery were disrupted, wound care and trauma remained relatively resilient. 

In 2019, the US generated around half of group sales, Emerging Markets & China just under 15% and the UK 4%. 

Unlike many other companies, S&N decided to pay its 2019 final dividend payment per share of 18.66p on 6 May. 

First-half results are scheduled for 29 July 2020.

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. 

Now, Covid-19 has caused huge disruption to hospitals and non-emergency surgery around the world, impacting the sale of its many devices. The current pandemic disruption follows what was a record year for sales, coming in at $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, while a second spike in the virus and further disruption cannot be ruled out. For now, investors may be content to sit on a company which has recently paid a dividend. 

Positives: 

• Exposure to favourable demographics
• Still paying a dividend

Negatives:

• Offer no full-year financial estimates or guidance
• A second spike in the virus would further disrupt

The average rating of stock market analysts:

Strong hold