What a relief ! Ops that can ease the pain of lockdown for investors
IT IS a painful business being a hip replacement company in a pandemic, and Smith & Nephew, like the patients who are waiting for its products, has had little choice but to suffer in silence.
The company, whose catalogue also includes antimicrobial care products for postoperative wounds and ulcers, posted a huge drop in sales for April as non-elective surgeries around the globe were cancelled to take pressure off hospitals and medical staff.
Even now, as non-Covid-19 treatments are restarted, those with iffy knees and hips are likely to be far back in the queue, with cancer screenings and other time-sensitive procedures taking priority.
That doesn’t mean our aches and pains are going away, though, and Smith & Nephew’s new chief executive Roland Diggelmann had an upbeat message for the market when he published a trading statement on Wednesday.
‘As demand increases, we are ready to step up and support customers through our robust supply chain, innovative products and some new ways of working,’ he said. Diggelmann used the usual Covid-19 clichés (including ‘unprecedented’ and ‘uncertain’) to explain some truly hideous numbers, including the 47 per cent slump in turnover in April.
However, the shares rose nearly three per cent on the day, reflecting some hopeful prospects and the firm’s financial strength, which usually makes it a popular stock in troubled times.
The balance sheet is strong with net debt of $1.8 billion (£2.75 billion) against $3.4 billion of facilities. The Watford-based company reports in dollars as most sales are in the US. Smith & Nephew is also saving where it can, but analysts believe this won’t be at the expense of future growth. Dr Adam Barker, research analyst at broker Shore Capital, praises the company for not skimping on research and development – which will keep it at the forefront of medical technology – instead saving on advertising, travel and promotions.
‘R&D investment remains protected and we see this as important for ensuring future innovation and the ability to outgrow the underlying market,’ he says.
There are already glimmers of light at the end of the tunnel. In China, elective surgery has started again, and there are signs that parts of the US will follow suit.
Some parts of the business have seen growth, with sales of advanced wound devices up 13 per cent due to continued demand from patients discharged from hospital, who might otherwise have to remain.
As a defensive stock with a usually predictable revenue stream, Smith & Nephew shares tend not to come cheap. They slumped in early March, but have since recovered by 44 per cent from their low on March 18 to £16.58.
It’s not possible to value them based on forward guidance at present, as the company has suspended earnings guidance for 2020, but the price to earnings ratio is 19.4, with a yield of 1.85 per cent on the latest available figures.
Analysts are divided on whether the shares are worth it at this level. While Barker says the risk of a second wave of Covid-19 could kill off elective surgery for far longer, Ian Forrest, investment research analyst at The Share Centre, has a ‘buy’ recommendation on the stock.
‘While the company is clearly being hit hard in the short term the longer term drivers remain in place,’ he says.
Traded on: Main market Ticker: SN/ Contact: 01923 477 100 or smith-nephew.com