Is This Health Care Equipment And Services Related Stock Performing On Track - Smith And Nephew PLC (LSE: SN.L)?

  • Feb 14, 2019 GMT
  • Team Kalkine
Is This Health Care Equipment And Services Related Stock Performing On Track - Smith And Nephew PLC (LSE: SN.L)?

Company Overview

Smith and Nephew PLC was incorporated in the year 1856, headquartered in London, United. The company was listed on the London Stock Exchange in the year 1937; ADR was listed on the New York Stock Exchange in the year 1999. It is currently a part of the UK’s FTSE100 index.

The company has sold products in more than 100 countries, spanning across six continents, with major markets: the US, Other established markets and Emerging markets. The company has several executives responsible for day-to-day management of the group with Roberto Quarta, the Chairmen, at the helm of the Board. Namal Nawana who joined the Board in May 2018, is currently appointed as the Chief Executive Officer.

Segments

The company's primary operations constitute designing, developing and selling medical devices globally. Business verticals: Sports, Medicine and Trauma (company’s most significant segment); Reconstruction and Advanced Wound Management. With around 16,000 employees around the world, the group’s reported annual sales in the year 2018 were $4,904 million.

Key Financial Metrics

key

Key Ratios

highlights

Financial highlights for the period ending 31st December 2018

  • For the year 2018, the company reported strong annual results. Revenue performance for all three business segments increased when compared with the previous year 2017.Financial highlights for the period ending 31st December 2018
  • In 2018, underlying revenue rose by 2% year-on-year to $4,904 million – towards the lower end of its guidance.
  • Trading profits earned for the year were $1,123 million, up by 7% year-on-year, mostly because of the $84 million settlement of its dispute with the insurers and the benefits of its APEX cost cutting. In 2018, the trading profit margin improved by 90bps to 22.9%.
  • Adjusted earnings per share increased by 7% year-on-year to 100.9¢ from 94.5¢ in 2017. Higher EPS performance exceeded analyst consensus of 95¢, mainly because of better trading performance and lower tax rate.
  • Disproportionate growth reported on a geographical basis: revenue from the primary market, US, increased 3% year-on-year, Other established markets revenue was mostly flat, and Emerging markets grew at the fastest pace at 8%.
  • The Segmental performance was consistent; Sports, Medicine & Trauma recorded a rise of 3% year-on-year and the Reconstruction grew by 3% YoY. However, growth in Advanced Wound Management was much less with revenue increased by a marginal 2% year on year.
  • For the year 2019, the company’s guidance for underlying revenue growth ranges in between 2.5% to 3.5%. It also expects trading profit margin to be in the range of 22.8% to 23.2%, meaning a 40-80bps improvement over 2018.

Relative Multiples Metrics

relative multiples

Recent Developments

Namal Nawana, Chief Executive of Smith and Nephew, is looking at the market prospects as the company’s current products are growing far more slowly than their markets. For the London listed Smith and Nephew, manufacturing medical devices like knee-replacement, sales rose by 2 per cent last year, while its current product portfolio targets market with about $40 billion of annual sales, a tenth of the global market.

The idea was however rejected by the shareholders, as the news broke out on Monday about NuVasive being investigated for a $3 billion acquisition (including debt), by Nawana. The stock prices fell around 4 per cent on the news.

Although the company’s top line is foreseeing a 6% increase, as per reports by Refinitiv, the spine market by itself looks quite slow in terms of growth. Although the company aims to target for a single digit top line growth, the spine market by itself looks quite slow in terms of growth prospects.

As per analysts at Piper Jaffray Cos., the deal would not see the daylight. Some market experts doubt over the success of the deal are hovering around as they believe that it may not see the light of the day.

Share Price Performance

Closing price on 13th Feb 2019 was GBp 1,459, down by 0.61 per cent when compared with previous day closing. In last one year, the company share performance increased by 16.86 per cent; FTSE 100 Index surged by 16.49 per cent, and sector performance also grew by 23.40 per cent respectively in last one year. The share growth trajectory is consistent from the past six months as the stock surged 7.12 per cent significantly. Current share price is considerable above all simple moving averages (30, 60, 200 days SMA). The 52-week high is GBp 1,548.50, and the corresponding low is GBp 1,242.50. The company P/E multiple is at 24.83x and stock beta, 0.51 (less volatile as compared to index).

Outlook

  • The profitability of the company is better than the industry performance, with further improvements expected in the next fiscal year.
  • Demand for its products has been growing, especially from emerging markets which is primarily driven by demand from China.
  • An ageing population in the developed world with a rising number of active retirees means hip and knee surgery is expected to rise. According to a study (Lancet, April 2017), global healthcare spending is expected to grow at a rate of 3% every year, reaching $16 trillion in the year 2030. Being a market leader of numerous products, this presents an excellent opportunity for the company to grow.
  • Drivers for healthcare demand – including a demographic shift towards older populations, increases in lifestyle-related ailments, advances in technology – seem to work in the company’s favour which it can capitalise.
  • Consumers have started to look out for cost-efficient products with an inclination towards more efficient care. The company is also under pressure to improve margins and find new sources of growth as it competes with bigger rivals.
  • The company must prepare strategic plans to explore better growth opportunities in emerging markets like China as the developed markets have started to saturate, leading to slower growth.
  • The company has begun to expand its product line-up and is looking at new companies for expansion to reduce competition and challenges.
  • The restructuring programme undertaken is expected to produce $160 million in an annualised benefit by 2022.

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