First-half revenue came in at $3.1bn, reflecting underlying growth of 2.3%. Growth of 7.7% in Sports Medicine & ENT more than offset declines in Orthopaedics and Advanced Wound Management.
Trading profit increased 8.1% to $0.6bn supported by productivity savings and a lower-than-expected tariff impact.
Free cash flow fell by $13mn to $231mn. Net debt, including leases, was $3.0bn. Full-year revenue growth guidance has been downgraded to around 4%, with underlying trading profit left unchanged at around 8%.
The group has completed $0.2bn of the $0.5bn share buyback programme, with the interim dividend increasing 4.0% to 15.6 cents per share.
The shares fell 7.5% in early trading.
Our view
Smith & Nephew delivered stronger first-half profits, with upgraded savings helping protect full-year profit guidance. But the weaker sales outlook proved hard to ignore.
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 have been 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 it shifts from older product lines to its next-generation implants. Some of that weakness reflects deliberate restraint on legacy implant sales ahead of the launch of the LANDMARK knee platform, but the transition has still looked a little stiff.
After a strong start to the year, Orthopaedics lost momentum in the second quarter, leaving LANDMARK key to near-term recovery. We think that it’s an exciting opportunity, but the softer run-up means that investors will want to see it quickly find its stride.
We see innovation as its biggest weapon for growing its share of a competitive market. In advanced wound care, the group’s negative pressure therapy products continue to evolve as management targets a multi-year growth opportunity.
But changes to US payments for skin substitutes are now expected to land towards the upper end of the previously guided $20-$40mn profit hit this year. That should be more than offset by tariff refunds, leaving the expected $60mn tariff headwind broadly neutral.
There’s a prospective yield of 2.7% on offer, and buybacks are underway, though not guaranteed. The balance sheet is reasonable, but stronger cash generation would boost confidence that higher shareholder payouts are sustainable.
It would also leave more room for investment, including acquisitions like the recent takeover of shoulder specialist Integrity Orthopaedics. Smith & Nephew should be able to bring this novel technology to a wider audience, but the required investment will drag on profits this year.
The valuation is some way below the long-term average, reflecting the markets' frustration. If management can start to consistently deliver on its promises, then sentiment could recover. But after a patchy record on meeting expectations, investors will need clearer proof points that current sales weakness is temporary.
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
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember that yields are variable and not a reliable indicator of future income. Keep in mind that 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 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.
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.