Following a profits warning in September, investors weren’t expecting much from Smith & Nephew’s (SN/, 479p) third-quarter results. And they were right not to – there wasn’t much news. The medical devices group announced that it would drop Dermagraft – an artificial skin product designed to treat leg ulcers – after US regulators refused to approve it, resulting in a £35m one-off charge. And overall performance has broadly met analysts’ expectations. Sales and operating earnings both increased by 11% year-on-year to £341m and £65m respectively, and the group expects revenues to rise by 14%-16% in 2006.
Still, the lack of big news doesn’t mean the shares aren’t interesting. They have been under pressure over the past few months amid fears that price growth for orthopaedic implants – the firm’s biggest business by far – could soon be capped under pressure from hospital chains and governments, says Robert Cyran on Breakingviews.com.
But such worries are overdone. Even if implant prices are constrained, “the industry would still expand far faster than most”, since an ageing and “increasingly obese” population needs more joints replaced. Mounting demand from retiring baby-boomers has underpinned annual revenue growth of about 10% over the past few years. New implants are being introduced all the time, and these tend to be more expensive because they lower costs for health providers (new hip implants tend to require shorter hospital stays, for example). All in all, a 15% annual revenue increase “looks easily sustainable for several years”.
Meanwhile, Smith & Nephew has “prudently shored up” its pension fund of late, says Questor in The Daily Telegraph, and should have £150m of cash by the end of next year, which it can put towards an acquisition or return to shareholders. Throw in the group’s “capable” management, and the shares look “attractive”. Williams de Broe still rates the shares a ‘buy’, while Morgan Stanley’s price target implies 18% upside from current levels.
Published in Tips & advice
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by
Annunziata Rees-Mogg
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