I’ve long been a fan of Smith & Nephew’s (LSE: SN) growth credentials and continue to be so, even if latest trading details released on Thursday fell short of the mark.
The builder of artificial joints and limbs was dealing 7% lower at the time of writing, with frightened investor behaviour today no doubt exacerbated by the strong share price run of recent months.
Established markets in the mire
The FTSE 100 business advised inits upate that revenues rose by a disappointing 5% in the first quarter, to $1.2bn. This upswing was created by foreign exchange tailwinds, however, as underlying sales flatlined in the period.
This poor performance has led Smith & Nephew to hack back its sales estimates for the full year and it now expects underlying revenue growth to range between 2% and 3% in 2018. The firm added that its trading profit margin will now merely be “at or above that achieved in 2017.”
Just three months ago Smith & Nephew pencilled in a 3% to 4% improvement in underlying sales this year, as well as an uptick in the trading profit margin of between 30 and 70 basis points.
The London-based business noted that trading in its established markets had been particularly worrisome. These territories — responsible for almost 85% of group turnover in 2017, of which the US accounts for around half — saw underlying sales slump 2% in the three months to March.
Smith & Nephew attributed this reversal to “some softer market conditions and weaker performance in Advanced Wound Bioactives.”
Not all bad, though…
It’s not difficult to see why investor appetite has soured so spectacularly today, and additional share price reversals cannot be ruled out in the short-to-medium term as the momentum in its critical segment fades, even if outgoing chief executive Olivier Bohuon tried to put some a positive spin on things.
Bohuon, who will hand over on May 7 to former Alere CEO Namal Nawana, said: “We expect trading conditions to return to more normal levels, which, combined with the continued rollout of new products and our sustained emerging markets performance, gives us confidence in delivering an improving performance trend during the remainder of the year.”
Regardless of whether or not conditions pick up markedly in its established regions, I remain convinced that Smith & Nephew’s bounding progress in lucrative emerging markets provides plenty of reason for stock pickers to keep the faith, as I explained last time out.
The medical mammoth saw revenues in these territories rise an aggregated 15% during January-March, speeding up from the 12% advance punched last year. And underlying sales here rose 9% in the quarter, the company again noting “strong growth from China.”
City analysts had been expecting earnings expansion of 1% and 8% in 2018 and 2019 respectively, figures that look sure to fall by the wayside following Wednesday’s statement. But Smith & Nephew’s long term investment case remains robust, and so neither the likelihood of some forecast reductions nor a current forward P/E ratio of 19 times would discourage me from investing today.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.