Interactive Investor

Smith & Nephew and LSE punished for results shortfall

3rd August 2023 15:52

Graeme Evans from interactive investor

There were bright spots in latest results from these two FTSE 100 companies, but the City is in no mood for any misses of which there were a few.

Positives in results by Smith & Nephew (LSE:SN.) and London Stock Exchange Group (LSE:LSEG) were lost in the latest FTSE 100 sell-off today as investors opted to focus on the areas for improvement.

Both companies nudged up full-year revenues guidance but shares in the medical devices firm fell by 24.5p to 1,127p and the financial markets and data platform by 198p to 8,088p.

The stock exchange’s fall was driven by misses on costs and average subscription value (ASV) as its 4.1% rise in half-year earnings to £1.87 billion came in 2% short of City hopes.

Chief executive David Schwimmer called the performance “strong and broad-based” and said the business was well placed to deliver further growth in the second half and beyond.

He highlighted the performance in the largest division of Data & Analytics, where the company has focused on a deeper understanding of customers’ data strategies and day-to-day usage.

It has been rewarded through improved win rates and an increase in the average size of deals, recently including a multi-year partnership with Barclays.

The ASV growth within Data & Analytics was 6.9% at June, consolidating the significant improvements made over the last two years. However, LSE saw a small sequential decline in the second quarter due to short-term timing differences.

On the costs side, first-half operating expenses of £1.73 billion were 3% higher than expected although much of this miss came from a currency-related balance sheet adjustment.

As one of the market’s most crowded trades, UBS said the misses were bound to be viewed unfavourably even though they have been driven by one-off or temporary effects.

The bank has a price target of 9,800p, while Bank of America sits at 10,000p as it believes LSE is well placed to benefit from structural demand for data and analytics.

The company’s backers include fund manager Nick Train’s Finsbury Growth & Income (LSE:FGT) investment trust and Microsoft Corp (NASDAQ:MSFT) after the tech giant built a 4.2% stake as part of a strategic partnership.

Schwimmer reported strong early progress on the tie-up, with hundreds of people from both organisations focused on building and delivering the first products next year.

LSE now expects revenue growth towards the upper end of 6-8% guidance, similar to the message of Smith & Nephew after it forecast 6%-7% compared with 5%-6% previously.

This follows a first-half jump of 12% in the sports medicine and ear, nose and throat division, which provides products and instruments used to repair or remove soft tissue.

The advanced wound management and the knee and hip replacement divisions both achieved growth in the region of 6%.

Trading profit of $417 million (£328.9 million) fell from $440 million the year before, a figure that missed consensus by 6% after the margin contracted to 15.3% from 16.9%.

Smith & Nephew blamed one-off factors for the margin decline as it stuck by expectations for a full-year figure of at least 17.5%.

Chief executive Deepak Nath hopes to deliver a margin above 20% by 2025 as part of his 12-point plan to make Smith & Nephew a “consistently higher growth company”.

He reported the launch of 13 new products so far this year, with others planned in high growth segments such as robotics, shoulder replacement and negative pressure wound therapy.

UBS, which has a “sell” recommendation and price target of 1,040p, believes this year’s margin target now looks increasingly hard to achieve.

Even if the company reaches the bottom end of guidance, the bank said this implied just 20 basis points of margin expansion in a year of  above normal revenue growth due to the one-off backlog recovery in elective procedures.

UBS said: “It still would need to deliver 125 basis points in 2024 and 2025 when we expect no such tailwind in order to meet management's above 20% target by 2025.”

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