Smith & Nephew's underlying revenue grew 6.9% to $1.4bn, in the first quarter of 2023. That reflects growth across all product segments, with Sports Medicine & ENT (ear, nose and throat) leading the way.
Weakness in China continued due changes in how the Government purchases medical supplies.
Guidance for the full year was unchanged with targets of 5.0% to 6.0% for underlying revenue growth and a trading profit margin of at least 17.5%.
The shares were flat in early trading.
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Our view
Smith & Nephew has made an encouraging start to 2023. The medical device maker operates through three segments - Orthopaedics, offering hip and knee replacements, Sports Medicine, a soft tissue repair business, and Wound Management, providing materials to manage injuries and prevent infection.
Demographic trends and widespread backlogs should continue to underpin demand for elective surgeries for some time to come. But Smith & Nephew is not just sitting and waiting for the market to drive its sales growth. It's continuing to develop and launch new products, cross-sell its wide product range across its territories, and introduce existing products into new areas of treatment.
We see innovation as its biggest weapon for targeting higher market share. In Orthopaedics, its cementless knee systems and work in robotic surgery are core differentiators. Another area where the group is a thought leader, is negative pressure wound therapy. It's also a part of the business where management sees an opportunity to scale up. We think the compelling clinical evidence of improved surgical wound healing supports this goal.
But while there are some structural growth opportunities, the group does face some challenges. The way China now buys its hip and knee replacement devices is one such hurdle. Bulk purchases have driven prices far lower, and that's taken a bite out of revenue growth. This will continue to make comparatives challenging throughout the first half of 2023. To make matters worse, inflationary pressure's squeezing margins. On top of this, supply chain constraints have driven an increase in inventories, as well as overdue orders to customers. Some progress is being made but challenges remain.
As profits thin, it's becoming challenging to support the investment needed to improve operations. Inflationary headwinds are keeping a lid on margins. This year's trading margin target of 17.5% is still well below pre-pandemic levels. A 12-point plan is in place to drive growth and productivity. The jury is still out on whether it will deliver.
The shares come with a 2.42% yield, which is nearly 2 times covered by forecast free cash flows. However, no dividends can be guaranteed, and given demands elsewhere in the business, we expect growth in shareholder distributions to remain modest at best for the time being.
Ultimately, execution has been a problem so far for Smith & Nephew and its medium-term goals have been reined back. If these targets can be achieved, then shareholders could be rewarded for their patience. Bold steps such as new manufacturing facilities and upgrades to production processes are underway. But we still see challenges ahead, not least the macro-economic environment, and overhauling the group's supply chain.
Smith & Nephew key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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