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Smith & Nephew's emerging priorities

The medical technology group continues to prioritise R&D spending
February 20, 2020

It’s darkly ironic that a medical technology group such as Smith & Nephew (SN.) could see trading suffer due to the spread of the coronavirus, but a rejigged management team continues to gradually improve the business within its influence. Once the dual effects of currency translations and acquisitions are stripped out, underlying full-year revenue was up 4.4 per cent, with sales accelerating through the fourth quarter.

IC TIP: Hold at 1,980p

The operating margin pulled back 170 basis points to 15.9 per cent, a reflection of increased research and development (R&D) spending and the completion of five acquisitions through the period, the largest of which was Osiris Therapeutics for $660m (£508m). The acquisition spree precipitated a steep rise in intangible assets, together with a 45 per cent increase in net debt (excluding lease liabilities), bringing the leverage multiple to a manageable 1.2 times adjusted cash profits.

From a clinical perspective, the group is seeing enhanced opportunities in the US due to developments in surgical technology, anaesthesia protocols and changes to Medicare reimbursement. But it’s the performance in the emerging markets space that catches the eye, with underlying revenue growth of 16.1 per cent. It is anticipated that these growth markets will provide enhanced cross-franchise opportunities, following the reorganisation of the group’s commercial model.

Consensus forecasts collated by Bloomberg give respective revenue and adjusted earnings per share of $5.38bn and 108.7ȼ for the December 2020 year-end, rising to $5.62bn and 118.1ȼ in 2021.

SMITH & NEPHEW (SN.)  
ORD PRICE:1,835.5pMARKET VALUE:£16.1bn
TOUCH:1,835-1,836p12-MONTH HIGH:2,023pLOW: 1,417p
DIVIDEND YIELD:1.6%PE RATIO:35
NET ASSET VALUE:587ȼ*NET DEBT:31%†
Year to 31 DecTurnover ($bn)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ)
20156.630.6045.930.8
20164.671.1088.130.8
20174.770.9087.835.0
20184.900.7876.036.0
20195.140.7468.637.5
% change+5-5+6+4
Ex-div:2 Apr   
Payment:6 May   
£1=$1.30. *Includes intangible assets of $4.36bn, or 498ȼ a share. †Includes lease liabilities of $170m.