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Smith & Nephew hip to be square

Smith & Nephew's entry into the wound care market has been a success, but its relatively small size compared with US competitors is a constant source of worry
November 14, 2013

What's new...

■ Markets still variable

■ Woundcare delivering strong results

■ Weak competitor growth

IC TIP: Sell at 802p

Knees and hips were always regarded as a relatively solid investment, but have been looking distinctly creaky over the past few years as patients elected to delay surgery and wait for better times. Judging by Smith & Nephew's (SN.) third-quarter results, that basic narrative is still dominating the industry, but the group's fast growing wound management segment is keeping profits growth ticking over.

The group's third-quarter underlying revenues were up by 5 per cent to $1.02bn (£630m) and operating profit was 10 per cent higher at $222m. Major markets in the US and Europe were largely subdued, particularly for hip and knee replacements where Smith & Nephew's performance was behind that of its competitors. However, it was a completely different picture at the wound care segment which grew underlying revenues by 12 per cent to $331m. Smith & Nephew significantly outperformed the rest of the wound management market, which grew by only 3 per cent in the three-month period.

This represents a bright spot for Smith & Nephew as most of the commentary in the advance of the results focuses on how poorly its major competitors were performing. For example, US med-tech giant Stryker Corporation (SYK) had a notably poor quarter, with the cost of recalling metal hip joints reaching $313m during the three month period.

 

Investec says...

Add. Smith & Nephew reported an in line set of third-quarter results and we think there are some green shoots for the group’s hip and knee portfolio. Although the orthopaedic market itself rebounded, this masks a stronger underlying performance from Smith & Nephew, which has faced a number of specific headwinds that may now begin to lessen. The shares look fair value for the growth on offer, but there is some upside potential from another cash return that is not priced in. We have made minor tweaks to our forecasts (currency assumptions, working capital, timing of investment and on individual product line growth rates), and now expect flat pre-tax profits and EPS of $982m and 76.4¢, respectively, in 2013.

 

Charles Stanley says...

Hold. Advanced wound management again performed strongly delivering revenue growth of 30 per cent year-on-year and 12 per cent on an underlying basis. It was pleasing to see signs of an improved performance in Advanced Surgical Devices, where revenue was flat. Overall, markets remain challenging, in part reflecting Smith & Nephew's over-exposure to Europe. Trading in line with peers, but facing a more challenging environment, we retain our hold recommendation for now.