Smith & Nephew Ready to Step Up
Someone has got a spring in their step.
Shares in Smith & Nephew, SN.LN +0.77% the U.K. maker of hip and knee implants, are up almost 25% this year, recently hitting all-time highs. S&N—once the subject of perennial takeover rumors—has spent this year snapping up businesses to get more products into emerging markets. Meanwhile, there are signs the orthopedic market is on the up. For investors, S&N could keep its bounce.
Orthopedics is, to some extent, a bet on economic recovery. The downturn meant patients opted to wait for elective procedures like hip and knee replacements. In Europe, the economic pickup has been later to arrive, while austerity added pressure on prices. At S&N, which has greater European exposure than larger U.S. peers, orthopedic growth has trailed the broader market.
It may now be catching up. In the third quarter, S&N's implant revenue grew by 3% in hips and 2% in knees, versus 5% and 4%, respectively, for the global market. The company is launching new products. Meanwhile, sales of S&N's metal-on-metal hip have slumped after problems with a rival system from Johnson & Johnson. JNJ +1.58% But that hit seems to be abating, knocking only one percentage point off S&N's total hip growth in the third quarter.
And S&N offers more than just joints. About 30% of sales this year are forecast to come from its wound-care division. An enzyme-based treatment to remove necrotic tissues from wounds is expected to post revenue growth of more than 40%; negative pressure therapy, which speeds up healing, is another fast-growing area in which S&N is taking market share.
The company has also moved into emerging markets ahead of rivals. Sure, its strategy of developing simplified products for emerging markets remains somewhat unproven. But after deals in India, Brazil and Turkey this year, S&N makes about 13% of sales in the developing world, a figure it expects to be 25% in five years.
S&N no longer comes cheap. At about 16 times 2014 earnings, according to FactSet, the company is trading in line with U.S. rival Stryker. SYK +1.86% But S&N's growth prospects in wound care could merit a premium, argues Bernstein. And with little debt, there should be room for further share buybacks even if the company continues to make small acquisitions.
That should help keep S&N sprightly.