Smith & Nephew plc: Shining Bright In A Greying World

Smith & Nephew plc (LON:SN) can benefit from an ageing population.

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Ageing populations are a fact of life not just in developed nations like the UK, but also in emerging economies such as China. As such, they make for a great long-term theme for investors to tap into. More elderly people means more demand for healthcare, which in turn means more demand for the tools of the trade such as drugs and medical equipment.

One company that looks well placed to capitalise on this trend is Smith & Nephew (LSE: SN) (NYSE: SNN.US), which is best-known for its artificial joints and orthopaedics business, but also has market-leading positions in endoscopy and advanced wound management. Emerging markets currently make a relatively small contribution to the business, but are growing at double-digit rates. For example, in China, where the group has first-mover advantage in certain markets, it saw revenues grow by more than 30% in 2013. With the firm also investing in other growth markets like Turkey and the Middle-East, the prospects for long-term growth look good.

A game-changing acquisition…

Smith & Nephew recently announced the acquisition of ArthroCare, a US-based company which makes products used in arthroscopic surgery on shoulders and knees, for $1.7 billion in cash. This looks like a great deal for Smith & Nephew for several reasons. Given that ArthroCare derives 68% of its sales in the Americas, it boosts Smith & Nephew’s presence in a region where it has traditionally been seen as weak.

In addition to this, the acquisition brings with it some exciting new technologies. For example, ArthroCare has developed a technology called coblation that utilises high-frequency energy and natural saline (salt water) to dissolve target tissue and preserve healthy tissue. Its oblation products are used in minimally invasive orthopaedic surgeries involving shoulders, knees and hips, as well as the ear, nose and throat, a new area for Smith & Nephew.

A healthy price tag…

Smith & Nephew’s 2013 results saw the firm report a trading profit of $987 million, a 5% increase on last year, on revenues up 4% at $4.35 billion. Underlying earnings per share of 76.9 cents (c.46.6p) means the shares are currently valued at more than 20x historic earnings, with a 1.7% yield. While those metrics are much pricier than the UK market as whole, I believe this reflects the quality of the business and its growth prospects.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James does not own shares in Smith & Nephew. The Motley Fool owns shares in Smith & Nephew.

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