Ahead of its Capital Markets Day, Smith & Nephew has re-iterated this year’s underlying revenue growth guidance of 5%. Trading profit margin is now expected to reach at least 19.5%, the mid-point of previous guidance.
For 2026, the group guided for underlying revenue to grow by around 6%.
The new strategic focus includes reaching more patients and driving differentiated product launches. The group’s also looking to simplify its product range, lowering its stock holding requirements and reducing the capital intensity of the business. As a result, Smith & Nephew expects a one-off hit to profit of $200mn this year.
Between 2025 and 2028, the group is targeting average annual growth of 6-7% for underlying revenue and 9-10% for trading profit.
The shares were broadly flat in early trading.
Our view
Markets were unmoved by Smith & Nephew’s trading update and outline of its wider strategic ambition. The focus on efficiency and innovation looks like a sensible approach to prospering in an attractive but competitive market. We want to see solid proof of delivery before getting too excited though. Achieving next year’s sales growth target of 6% alongside a further improvement in margins would be a significant step in the right direction.
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.
The Orthopaedics division has been a problem child for the group, hampered by a lack of scale. Operational improvements have had some success in overseas markets, and there are some early signs that this can be replicated in the US.
The division’s biggest revenue generator is knee replacements. In the US, this category has been underperforming the wider market as the group shifts from older product lines to its next-generation implants. With rationalisation of the product range a key strategic pillar, commercial traction in recently launched devices will be a key theme to monitor.
An ageing population and growing affluence in emerging markets are both tailwinds for surgical procedure growth. 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 gaining market share. The group’s negative pressure wound therapy products continue to evolve as management targets a multi-year growth opportunity. Its regenerative therapies for sports injuries are also seeing strong sales momentum.
But the group does face some challenges. Underlying operating margin targets have been kicked down the road several times and are materially behind the original recovery plan. High levels of competition in some core product areas and markets could prove to be a further brake on margin growth.
There’s a prospective yield of 2.7% on offer, and there’s scope for more generous shareholder payouts further down the line if management can hit its $1bn annual free cash flow target by 2028, but there’s no guarantee.
As it stands, Smith & Nephew’s valuation looks broadly reflective of market forecasts. If management can deliver on its medium-term targets, there’s scope for upside. But as we’ve seen before, there are likely to be challenges along the way.
Environmental, social and governance (ESG) risk
The healthcare industry is medium/high risk in terms of ESG, depending on subindustry. Across the board, product governance is the most acute risk, with business ethics, labour relations and data privacy also contributing. Providing reasonable access to healthcare as a basic service is also a growing issue, with greater concerns surrounding the social implications of for-profit healthcare companies.
According to Sustainalytics, Smith & Nephew’s management of ESG risks is strong.
The company does not appear to be caught up in any significant controversies. Its strong position in the hip transplant market leaves it exposed to higher litigation risk than some peers. Smith & Nephew addresses this risk via the relevant product safety certifications. There are also strong programmes in place for whistleblowing, and bribery and corruption, as well as an adequate cybersecurity programme. However, the company’s clinical trial programme has scope for improvement, as does its approach towards diversity and inclusion.
Smith & Nephew key facts
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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 LSEG. 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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