Smith & Nephew (S&N) was hit by a series of downgrades as it became clear that the recession in the US was making patients and insurance companies delay knee and hip replacement operations and causing hospitals to defer the capital spending that forms the bulk of the S&N's revenues. Although underlying sales grew by 6 per cent in the half, in the second quarter like-for-like sales in the orthopaedics division, accounting for 58 per cent of revenues, rose by only 1 per cent.
By contrast, the group's endoscopy and advanced wound-management divisions posted underlying sales growth of 12 per cent and 8 per cent, respectively. The underperformance in the orthopaedics division is particularly worrying. There are safety concerns over its hip resurfacing business, which was flat in the half, underperforming the market, in addition to increased pricing pressure in the reconstruction market. Management did say that there were some signs of improvement, but it seems clear that orthopaedics won't catch up with the rest of the market this year.
The settlement with the vendors of Blue Sky Medical Group contributed 130 basis points out of the 240-basis-point rise in the profit margin to 24.4 per cent, which helped trading profits rise 17 per cent to $476m (£300m). However, Investec Securities expects to downgrade EPS estimates by 5 per cent for this year and next to 67c and 72c, respectively (65.6c in 2009).
SMITH & NEPHEW (SN.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 577p | MARKET VALUE: | £5.13bn | |
| TOUCH: | 576-577p | 12-MONTH HIGH: | 701p | LOW: 461p |
| DIVIDEND YIELD: | 1.6% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 260¢* | NET DEBT: | 31% | |
| Half-year to 03 Jul | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 1.80 | 322 | 24.5 | 5.46 |
| 2010 | 1.95 | 436 | 33.4 | 6.00 |
| % change | +8 | +35 | +36 | +10 |
Ex-div:13 Oct Payment:2 Nov *Includes intangible assets of $1.44bn, or 162¢ a share £1:US$1.58 | ||||
