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Underappreciated potential at Smith & Nephew

The medical devices giant has had another solid year and the shares now look good value
February 8, 2018

A return to underlying profit growth is what investors were looking for in Smith & Nephew’s (SN.) final results, and to a large extent the company delivered. After six consecutive years of declines, adjusted operating profits rose 3 per cent to $1.05bn (£751m), which fed through to a 14 per cent rise in adjusted earnings – although the improvement was largely thanks to a big fall in tax payments, courtesy of President Trump.

IC TIP: Buy at 1236p

But investors didn’t seem convinced that the medical devices giant has turned a corner. That may be because management plans to spend $100m on the accelerating performance and execution ‘APEX’ strategy in 2018, which is likely to eat into profit growth. Even so, analysts at Bernstein expect adjusted EPS of 103ȼ in the year to December 2018, from 89ȼ last year.

Beyond 2018, the outlook is even better. APEX is expected to deliver annual savings of $160m by 2022, meaning operating profit margins should increase from the 19.6 per cent reported in these numbers. Meanwhile, the extensive research and development investment of recent years is paying off. Revenues rose in six of the group’s nine product categories in 2017, with a particularly impressive performance in the sports medicine and joint repair unit, where sales increased 6 per cent to £173m in the fourth quarter.

SMITH & NEPHEW (SN.)  
ORD PRICE:1,236pMARKET VALUE:£10.8bn
TOUCH:1236-1237p12-MONTH HIGH / LOW:1,442p1,143p
DIVIDEND YIELD:2.0%PE RATIO:20
NET ASSET VALUE:531ȼ*NET DEBT28%
Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ)
20134.350.861.727.4
20144.620.756.129.6
20156.630.645.930.8
20164.671.188.130.8
20174.770.987.835.0
% change+2-17-+14
Ex-div:05 Apr   
Payment:09 May   
*Includes intangible assets of $3.74bn, or 428ȼ a share  £1=$1.39