Smith & Nephew hobbled by supply shocks

Hip and knee implants have become unexpected casualties of supply shocks in metals markets. 

In the first half of this year, medical device manufacturer Smith & Nephew (SN) saw cash generated from its operations fall to $227mn (£186.88mn) from $459mn in the first six months of 2021. According to the firm, this was driven primarily by the spot buying of raw materials and components to secure supply.

Orthopaedics is Smith & Nephew’s most profitable division, accounting for just over 40 per cent of its total sales. Knee implants, meanwhile, are the company’s most popular line of products. Its two other franchises–sports medicine & ENT and advanced wound management–both reported single-digit revenue growth in the first half of the year.

The company now expects its trading profit margin for the year to be around 17.5 per cent, a figure that reflects the continued impact of global inflation and ongoing issues with materials supply. Management was previously targeting a trading profit margin of 17.9 per cent. 

Though Smith & Nephew’s FY 2022 revenue guidance of 4-5 per cent growth remains unchanged, analysts are increasingly sceptical that the firm will be able to reach its longer-term targets. 

“The downgrade to 2022 is significant but more importantly in our view, this makes delivering the 2024 trading margin of 21 per cent or above unlikely, given the 2022 starting point is now set to be 17.5 per cent,” wrote UBS analysts in a note. 

Shares in Smith & Nephew fell by more than 10 per cent after the release of its interim results. Optimists might say this is an overreaction and that the company has solid plans for growth. But inflation and supply issues aren’t likely to be resolved overnight. Hold.