5th Feb 2014 15:23
LONDON (Alliance News) - Smith & Nephew PLC is Thursday expected to report a rise in fourth quarter profits, as it begins to benefit from a shift in strategy to expanding its emerging markets following the arrival of Olivier Bohoun as chief executive officer in 2011.
According to analyst consensus provided by the UK-based medical technology company, Smith & Nephew is expected to report fourth quarter revenues in a range between USD1.11 billion to USD1.20 billion, slightly up from USD1.08 billion in the previous year. Trading profit is expected to be between USD272 million to USD303 million, slightly up from USD272 million, while earnings per share are expected to be 20.0 cents to 23.5 cents, up from 21.6 cents.
The company is expected to report slowing revenue growth as squeezed health budgets in the US and Europe hit its sales, while margins are expected to come under pressure too even though profits will be helped by cost cutting.
Cannacord, which has Smith & Nephew on a 'Buy' rating, said that it believes its acquisition and emerging markets strategy will position it for sustainable growth in faster-growing markets going forward.
Jeffries, which has reiterated a 'Buy' rating for the company, said that whilst it is forecasting modest earnings growth over the next three years, it is "confident that management envisages higher growth than what it communicates and that a deeper, cultural change is taking place at the company which will bear fruit over time."
However, Jeffries noted potential issues such as higher-than-expected pricing pressures from US hospitals and European budget restraints.
"Largely, the weaker top-line growth caused by a challenging market environment has been offset by greater cost-savings helping profitability," Jeffries said. "However, we believe we have yet to see the result of the internal changes."
Bank of America Merrill Lynch reiterated its 'Buy' rating for Smith & Nephew. BoA said that it believes "that the company is finally addressing the underinvestment that has held back group performance and led to market share losses in orthopaedics in recent years."
BoA believes that a return to double-digit growth is possible, saying it expects "continued strong growth in the Wound Management and Sports Medicine businesses as well as a return to margin expansion, as Smith & Nephew continues to execute on its efficiency programme and a number of short term headwinds dissipate."
BoA said that the main reason for the company's weak earnings growth in recent years has been a weak performance in orthopeadics. "The orthapaedic market has been under pressure for several years from slowing volumes of elective surgery in the US, and increased pricing pressure from both hospitals and regulators."
However, BoA noted four US joint reconstruction manufacturers, JNJ, Zimmer, Stryker and Biomet, reported stronger-than-expected organic hip and knee growth in the third quarter.
BoA also noted the shift in focus towards emerging markets, saying Smith & Nephew's "focused strategy on emerging markets is starting to bear fruit."
Berenberg said it expects to see "reasonable revenue growth" from Smith & Nephew, but noted that it expects margin to likely still be soft. It expects it to deliver 4% revenue growth in its fourth quarter "driven mainly by 11% underlying growth in wound as continued strength in the bioactives business is, in our view, likely to offset sluggish growth elsewhere in wound."
"Margin declines are widely expected, but of more interest will be any language in the guidance that narrows down when the "medium term" target of a 24% trading margin is likely to be obtained," the bank said. It recently maintained its 'Hold' rating for Smith & Nephew.
Smith & Nephew said Monday that it will acquire medical devices company ArthroCare Corp for USD1.7 billion to bolster its sports medicine business.
The company said it expects cost and revenue synergies from the acquisition of around USD85 million to its annual trading profit in the third full year.
The acquisition comes after a former senior executive of ArthroCare pleaded guilty to a scheme to defraud the ArthroCare's shareholders of USD400 million. The company announced on January 7 that it would pay a USD30 million fine to resolve the investigation by the US Department of Justice.
The Justice Department charged the company with conspiracy to commit securities fraud and wire fraud. However, it has entered into a two-year deferred prosecution agreement with ArthroCare, whereby ArthroCare must meet the Justice Department's requirements to avoid charges.
An analyst at Numis Securities Limited called the acquisition a "solid move", saying that it is fairly low risk. Numis raised its price target for Smith & Nephew to 1,000 pence from 960p.
Berenberg agreed that the "strategic rationale for the acquisition is sound", and Arthrocare's products would be a reasonable fit for Smith & Nephew. The acquisition would bring Smith & Nephew back to the ear, nose and throat market after 13 years, Berenberg noted, after it sold its ENT business to Gyrus for GBP52.5 million in 2001.
Berenberg did note that, whilst the acquisition price was a 20% premium over the 90-day volume-weighted average price for ArthroCare, it was just a 6% premium over its last closing price, leaving it potentially open to an interloper to come in with a higher bid before the acquisition is passed by shareholders. The broker said it didn't think the deal was a "must do" deal for Smith & Nephew, "so if a strategic shareholder seeks to try and extract a higher price, we are not convinced that Smith & Nephew will be forthcoming."
However Berenberg said that "the bigger risk, in our view, is simply that a significant number of ordinary shareholders view the 6% premium as unacceptabl(y)" small.
Shares in Smith & Nephew were trading down 0.06% at 873.50 Wednesday afternoon, ahead of the release of its results Thursday morning.
By Hana Stewart-Smith; [email protected]; @HanaSSAllNews
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