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Smith & Nephew - on track to meet full year guidance

Third quarter revenues were up 4.8%, ignoring currency movements.

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Third quarter revenues were up 4.8%, ignoring currency movements. Growth in Orthopaedics of 2.1%, which was entirely driven by knee implants. Performance was held back by China where government policy is keeping prices down. Excluding China, other territories were up by 5.6%.

The faster growing divisions were Advanced Wound Management up 6.0% and Sports Medicine/Ear Nose & Throat up 7.1%. This reflected a good performance from recent product launches. Further launches are planned across the portfolio.

Full year underlying revenue growth is now expected to be in the middle of the previously stated range of 4% to 5%. The expected trading profit margin guidance remains steady at 17.5%.

The shares were up 1.8% following the announcement.

View the latest Smith & Nephew share price and how to deal

Our view

Smith & Nephew's struggling to deliver on its efficiency goals against an increasingly challenging backdrop.

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.

Widespread backlogs should continue to underpin demand for elective surgeries for some time to come. However, we question to what extent healthcare systems have the capacity to accelerate the rate at which patients are treated.

Things are starting to normalise, which should be driving revenue growth in all three divisions. Advanced Wound Management and Sports Medicine are leading the growth charge, but unfortunately Orthopaedics is still up against some challenging headwinds.

The first is a change in the way China buys its hip and knee replacement devices. Bulk purchases are bringing unit costs far lower, and that's taken a bite out of revenue growth. To make matters worse, inflationary pressure's squeezing margins, making it very difficult for Smith & Nephew to deliver on its efficiency programme.

As profits thin it's going to become more and more challenging to support the investment needed to improve operations. Inflationary headwinds are expected to keep a lid on margins this year, with a disappointing 17.5% forecast for the full year against earlier guidance of over 18%.

A 12-point plan is in place to drive growth and productivity. The jury is still out on whether it will deliver, but we are glad to see innovation is alive and well at Smith & Nephew. Recently it became the first orthopaedics company to receive US regulatory clearance for a revision condition where failed implants are remedied (in this case knee surgery) using a robotics-assisted platform.

Coupled with a modest 3.2% prospective dividend yield, the market isn't overly excited. That's reflected with the group's P/E ratio of 13.5, below the long-term average.

Execution has been a problem so far for Smith & Nephew and with the backdrop continually worsening, the near-term case for growth is muddied. With that said, Smith & Nephew's longer-term growth story still exists. If the group can bring margins back into growth territory, it's still well placed to capitalise on a global backlog of elective surgeries.

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 3rd November 2022