- Market is expecting better second half growth
- Strong dollar likely to remain a headwind
- Big transformation promised by new chief executive
Arguably the earnings bar has been lowered for medical equipment maker Smith & Nephew (SN.) ahead of third quarter earnings due on Thursday this week.
While the price-to-earnings ratio has slipped by a third over the last 12 months, analysts have been busily downgrading their full-year earnings forecasts which have dropped around 15% since the start of the year.
Shares in the knee and hip replacement firm are down around 23% so far in 2022 and remain 50% below pre-pandemic levels.
STRONGER SECOND HALF ANTICIPATED
First half revenues rose 3.5% on an underlying basis while foreign exchange headwinds, principally the strength of the US dollar, kept reported revenues flat.
Meanwhile, trading profit dropped 4% as margins fell from 17.6% to 16.9% reflecting input cost inflation in freight and logistics and higher sales and marketing expenses as the business continued to recover from the pandemic.
Given the firm maintained its full year revenue growth guidance of 4% to 5%, investors are not unreasonably expecting an improvement in the second half.
However, since July however, the pound has fallen by a further 5% against the dollar.
The full year trading margin guidance was reduced to 17.5% at the first half as the ‘prolonged impact of the inflationary environment and continued external supply challenges’ continued to impact profitability.
Further out, the firm aims to grow underlying organic revenues structurally ahead of historic levels in the 4% to 6% range by 2024.
Management is also hoping to rebuild the trading margin to 21% by 2024 with further improvements thereafter.
UNDER NEW MANAGEMENT
Investors will be keen to hear about the firm’s latest ‘transformation’ strategy from new chief executive Deepak Nath, who took over from Roland Diggelmann on 1 April.
After only a few months in the post Nath, promised a big change of fortune saying he was ‘confident in our ability to transform Smith & Nephew into a structurally higher-growth business delivering greater value for all our stakeholders.’
