Smith & Nephew’s first quarter underlying revenues rose 2.9% to $1.4bn.
There were strong performances in orthopaedics (underpinned by international growth outside the US), and Sports Medicine/ENT, despite ongoing headwinds in China. Together this more than offset a 2% decline in Advanced Wound Management sales which had a mixed performance across its product categories.
Full-year guidance remains in tact. The forecasted 5-6% underlying revenue growth rate is expected to be bolstered by new product launches and clinical evidence supporting the use of the group’s product range.
The shares were up 2.8% in early trading.
Our view
The market reacted positively to Smith & Nephew’s commitment to achieving full-year guidance. But with growth tracking below target in the first quarter there’s some catching up to do later in the year.
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 continue to underpin the market for elective surgeries. But there are some signs that the pent-up demand built up during the COVID-19 pandemic is starting to normalise. Smith & Nephew is not just sitting and waiting for the market to drive its sales growth. It's continuing to develop, acquire 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. Here, the Group’s products continue to evolve as management target a multi-year growth opportunity. It’s regenerative therapies for sports injuries are also seeing strong sales momentum.
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 made for some tough readingover the last year. This continues to drag on growth and will remain a headwind for 2024 as a whole.
It's proving harder than expected to rebuild margins. A good second-half performance last year helped the Group reach its 2023 target of 17.5% for underlying operating margins, but they are still well below pre-pandemic levels.
A target of 18% for 2024 is materially behind the original recovery plan, and there’s still a lot of work to do if Smith & Nephew is to reach the previously lowered target of at least 20% for 2025. This is reflected in the valuation which sits below the long-term average. Investors could be rewarded if Smith & Nephew makes good on its promise. But the market will need to see further evidence of improved productivity. Otherwise sentiment is unlikely to continue its upward momentum.
Market forecasts suggest a prospective yield of 3.3%, but as ever there can be no guarantees. And given the relatively high debt levels and drive for product innovation, there may be limited scope to increase payouts to shareholders.
Smith & Nephew key facts
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