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Smith & Nephew - set to hit top end of revenue guidance

Smith & Nephew's third-quarter underlying revenue rose 7.7% to $1.4bn.

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Smith & Nephew's third-quarter underlying revenue rose 7.7% to $1.4bn. That reflects growth across all major product areas, with Sports Medicine & ENT (ear, nose and throat) being the standout performer, up 11.1%.

In the final quarter, improved growth in Advanced Wound Management and Orthopaedics is expected to offset slower growth in Sports Medicine, which is battling headwinds in China.

Full-year underlying revenue growth is now expected to be at the higher end of the group's 6-7% guidance.

Margins are expected to improve in the second half in line with usual seasonal uplifts. Despite this, full-year guidance has been downgraded slightly, with the trading profit margin now set to be around 17.5%, rather than at least 17.5%.

The shares rose 4.4% following the announcement.

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Our view

Smith & Nephew's positive sales trajectory continued in the third quarter, meaning the group looks set to hit the upper end of full-year guidance.

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, new product lines and capabilities are being added to the CORI robotic surgery platform, where the group is seeing accelerated adoption by clinicians. Another area where the group is a thought leader is negative pressure wound therapy, which has enjoyed double-digit growth so far this year.

But while there are some structural growth opportunities, the group does face some challenges.

A change to the way China buys its hip and knee replacement devices has caused some tough reading for investors over the last year. Comparative periods should get easier from here, but the underlying market remains weak and management expects this to remain a headwind to margins in the new year.

As profits thin, it's becoming challenging to support the investment needed to improve operations. All the while, inflationary headwinds continue to keep a lid on margins. This year's trading margin target of 17.5% is still well below pre-pandemic levels, and first-half margins fell well short of this mark. The Group's been working hard to improve productivity too and is hopeful that a significant seasonal uplift in second-half trading will help bridge the gap. However, we think there's still plenty of work to be done to get there.

Market forecasts suggest a prospective yield of 3.5%, but as ever there can be no guarantees. And given the poor cash flows and increasing debt levels seen over the first half, we have some concerns over the sustainability of dividends if cash generation doesn't begin to improve.

Ultimately, execution has been a problem so far for Smith & Nephew and it's still falling short of its previously reined-back medium-term goals. If these targets can be achieved, then shareholders could be rewarded for waiting, but the recent market reaction suggests that investor patience is wearing thin and shareholder returns are not guaranteed.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 2nd November 2023