Smith & Nephew's Sales Get a Kick Out of Knees

The firm's third quarter knee sales were up 6% on an underlying basis, which looked strong to us compared to its peers, especially in this weak economic environment

Julie Stralow, CFA 8 November, 2010 | 5:38PM
Facebook Twitter LinkedIn

Smith & Nephew (SN.) turned in solid third-quarter operating results. To account for recently generated cash flow, we may boost our fair value estimate for Smith & Nephew after digging into these results further.

In total, sales grew 4% on an underlying basis to $941 million. Orthopaedics grew 2% on an underlying basis as hips stabilised in the quarter even as the debate continued about metal-on-metal solutions, which has affected Smith & Nephew's flagship Birmingham hip resurfacing product. The firm will continue trying to differentiate that product from other metal-on-metal solutions in the marketplace. In the meantime, the firm's traditional hip products are picking up the slack. Also, the firm's knee sales were up 6% on an underlying basis, which looked strong to us compared to its peers, especially in this weak economic environment. The company's 30-year wear claim for its new Verilast technology appears to be boosting growth in that niche, and the success of this system and the direct-to-consumer marketing campaign surrounding it highlights that demand and mix benefits are possible for orthopaedic devices that are truly differentiated from the pack.

In its other segments, Smith & Nephew produced mixed results. Endoscopy grew 4% on an underlying basis with arthroscopy tools growing 8% but more capital intensive visualisation tools falling 19% in the quarter. While some other capital equipment and instrument companies have seen growing results in the third quarter, we remain somewhat concerned about the sustainability of that recovery. While Smith & Nephew's results in that niche keep us somewhat wary about ongoing trends in hospital capital spending, we also note that the business was affected by the company's culling of certain tools that aren't related to its arthroscopy business. In advanced wound management, though, the firm turned in 7% growth on an underlying basis, as the firm continues to steal share from Kinetic Concepts (KCI) in negative pressure wound therapy. With a key legal win for Smith & Nephew in the US in October, we expect those trends to continue.

On the bottom line, Smith & Nephew also performed admirably, maintaining a 23% operating margin in the seasonally weak third quarter. The company also generated $394 million in free cash flow through the first nine months of 2010. We still expect the firm to generate more than $550 million in free cash flow in 2010, a steep increase from 2009 when the firm only generated $401 million in free cash flow.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Smith & Nephew PLC1,180.50 GBX-0.80Rating

About Author

Julie Stralow, CFA  Julie Stralow, CFA, is a senior securities analyst with Morningstar.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures