Smith & Nephew's (SN.) momentum continued in the second quarter. While we've trimmed our near-term outlook primarily for potential regulatory changes in the United States, that factor was offset by cash flow generated since our last major update. We're maintaining our fair value estimate.
During the quarter, sales grew 12% (5% in constant currency) to about $1.1 billion. The orthopedic segment grew 4% in constant currency, outpacing the market thanks to momentum in knees with the Verilast technology.
Profitability remained weak, as investing activities and mix issues (higher growth from relatively low-margin products) outweighed efficiency gains. These factors may weigh on results for the next several quarters, especially as the firm implements some strategic changes under its new CEO. However, while initiatives such as creating emerging markets and international divisions may induce short-term profitability pressures, they could provide key growth in the long run, as developed markets become more difficult to operate in and mature.
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