Something seems to have gone astray at medical equipment maker Smith & Nephew (SN.) over the past three months. As recently as February, sales were projected to grow at an underlying rate of 3-4% this year with improved profit margins. Now the projection has been cut to 2-3%, with margin improvement less than expected.
At first that doesn’t look too serious a downgrade. What is worrying, though, is that after a weak first quarter S&N is working on the assumption that the rest of the year will be fine. What if management has been as overoptimistic about the next few months as it has been over the past four? Revenue growth of 5% in the first quarter was entirely due to favourable currency movements, so the underlying figure was flat.
S&N has form on this. Only last November it cut its guidance for 2017, blaming hurricanes in the Caribbean. This supposedly temporary setback seems to have extended into 2018 without the assistance of the weather.
The shares dropped 7% on the update. Heavy hopes rest on a new chief executive who starts next week. I won’t be backing him with my money until he shows he can get sales moving.
Prepare for More Bad News from Carpetright
Let’s get this straight: we’re still having work done on our homes, we’re just not laying carpets? I find that hard to believe.
Another profit warning from Carpetright (CPR) pushed the shares even lower. Let’s not dwell too long on this misadventure except to say that there is highly unlikely to be any genuine good news this side of Christmas. If you have stayed in through three years of declining share prices you really don’t want to listen to common sense.
However, figures from builders’ merchant Howden’s Joinery (HWDN) a day later were in sharp contrast. Revenue was up 14.8% in the first four months of the year, 13.3% like-for-like. That was mostly increased volume, for Howden did not raise prices until the start of April, which means figures should be better from now on - assuming the increased prices stick, which admittedly didn’t happen last time when Howden’s price increases were a little too aggressive.
It’s true that the latest figures were boosted artificially, firstly because there was an extra week in the period and secondly because Howden had a poor start to last year so comparatives are undemanding. Even so, this is a decent start to 2018 for a company that continues to gain in a tough market.
The shares fell off a cliff immediately after the Brexit vote almost two years ago and have been clawing their way back ever since. They now stand at a two-year high. Even so, I cannot feel they are too expensive. There is a decent yield and a progressive dividend that is well covered. If you’re in, stay in; if you’re interested, look for any fall in the share price as an opportunity to get in.
Sainsbury's Comes Good
At last, my holding in Sainsbury’s (SBRY) is breaking even. For a couple of days after the announcement of a proposed merger with rival supermarket ASDA, it was actually in profit – though that is without counting in all the dividends I have had, which puts me well ahead.
I intend to hold on for the long-term, but I seriously considered selling at the top on Monday and probably should have done. I really cannot recommend the shares above 300p because I have reservations about the Asda deal even though my initial of being hit with a rights issue proved unfounded.
There are potential competition issues. The merger could be blocked or involve the sale of an unhelpful number of stores. In any case, I’m not convinced that merging two such different chains will produce a wonderful improvement in either.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.
