Hip and knee implants aren’t the most glamorous of medical devices – but they are consistently in demand and the companies that make these products should be able to deliver stable growth. While this was historically the case at Smith & Nephew (SN.), the group’s orthopaedics division has been a drain on margins (and investor enthusiasm) in recent quarters.
The shares are down 5 per cent in the year to date and trade off a full-year price/earnings multiple of 14.8 times, according to FactSet broker consensus. This is vastly different to ConvaTec (CTEC), the London market’s other big medtech, whose shares are up 8 per cent since January and trade off 21.9 times forward earnings. However, it wasn’t so long ago that the company embarked on a turnaround plan to rectify its underperformance – and Smith & Nephew appears to be on a similar trajectory.
On paper, Smith & Nephew is in reasonable health, with first-quarter revenue ticking up 3 per cent on an underlying basis to $1.39bn (£1.11bn). Turnover in the orthopaedics business was up 3.6 per cent, although sales of knee and hip implants in the all-important US market fell 5 per cent and 2 per cent, respectively. Yet analysts covering the company seem less troubled by these revenue fluctuations than with the division’s falling profitability.