Interactive Investor

The top FTSE 100 stock and worst on Wall Street

21st February 2023 15:27

by Graeme Evans from interactive investor

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Shares in this company are up 25% since October at an eight-month high, but some big American firms are struggling. We name them here.

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A plan to turn Smith & Nephew (LSE:SN.) into a “consistently higher growth company” won over investors today as shares in the medical devices firm raced ahead in the FTSE 100 index, beating HSBC (LSE:HSBA) into second place.

The rise of 60p to a seven-month high of 1,221p came as chief executive Deepak Nath said a 12-point turnaround strategy launched last summer was starting to deliver, leading to his updated forecast for profit margin expansion to at least 20% by 2025.

This compares with 17.3% in today’s annual results as trading profits fell to $901 million (£746 million), a decline driven by the impact of higher inflation during the year.

Nath expects business to accelerate from the second quarter of this year, leading to annual revenues growth of between 5% and 6% as the company's sports medicine and advanced wound management franchises are backed to continue performing strongly.

Productivity improvements and the early benefits of cost-saving initiatives should more than offset macroeconomic headwinds to deliver a margin of at least 17.5% this year.

Nath is also looking for a stronger performance in orthopaedics after the recent performance of the knee and hip implant division was held back by poor operational systems.

He added: “We expect to deliver both faster revenue growth and margin expansion in the coming year, and are setting a solid foundation for our midterm ambitions as we transform to a consistently higher growth company.”

Nath backed up his optimism by declaring an unchanged final dividend of 23.1 cents a share for payment on 17 May, leading to a total for the year of 37.5 cents.

UBS is unconvinced by the latest mid-term guidance, however. The bank has a “sell” rating and target price of 970p, adding that the 2025 margin target of above 20% looked ambitious.

Meeting this goal would require 1.25 percentage points of expansion in each of 2024 and 2025, but UBS notes the company has only delivered 1% or more three times since 2006. Those years were 2009 and 2010 after the financial crisis and 2021 after Covid disruption.

Wall Street is negative influence

Across the FTSE 100 index, a weaker performance reflected the impact of poor Wall Street sentiment as traders returned after yesterday’s Presidents’ Day holiday.

The Dow Jones Industrial Average and S&P 500 index lost around 1% in early dealings, with home improvement retailer Home Depot (NYSE:HD) one of the worst-performing stocks after it missed quarterly revenues estimates due to the impact of higher prices on demand.

Walmart (NYSE:WMT) shares also traded lower after the retail bellwether underwhelmed with its guidance for the current year.

For the last financial year, Walmart’s revenues increased by 6.7% to $611.3 billion (£506.2 billion) but pre-tax profits fell by 9% to $17.02 billion (£14.1 billion). It increased the full-year dividend to $2.24 from $2.20.

Walmart expects net sales to increase in the current year by between 4.5% and 5%, with operating income forecast to be between 3.5% and 4%.

Chief executive Doug McMillon said: “We built momentum in the third quarter and that continues. We are well-positioned to start this fiscal year.”

US shares were also impacted today by continued uncertainty about how much further interest rates will need to rise in the coming weeks. Deutsche Bank added: “The data momentum has been positive of late but it’s going to be hard for the next few months to assess where we should be at this stage of the cycle.

“There has no doubt been big improvements from gas price falls and loosening of financial conditions but we’re yet to see anything close to the full lag of monetary policy filter through to the US and Europe.”

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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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