The medical technology firm attracts me because it operates in a defensive industry with constant demand. At least under normal circumstances demand is steady. And we can see evidence of that in the company’s long record of gradually rising revenue, earnings operating cash flow, and shareholder dividends.
Temporary collapse of demand
Smith & Nephew makes medical devices such as the replacement joints, fittings, nuts, bolts, rods, bits and pieces for skeletal joint and fracture repair. It also caters for advanced wound care and arthroscopic enabling technologies, among other things.
However, normal medical operations around the world have been postponed to accommodate Covid-19 patients. Naturally, the share price plunged in the stock market crash. But it’s been coming back, and it looks like the move higher is continuing today.
Chief executive Roland Diggelmann said in today’s report, countries and healthcare systems around the world are facing “an unprecedented challenge.” And Smith & Nephew is suffering a “significant” hit to trade. In the first quarter of the year to 28 March, revenue eased back just under 8% compared to last year’s figure.
However, in April, underlying revenue plunged around 47%, “reflecting suspension of elective procedures in most markets.” Yet it’s not all doom and gloom. The figure would have been worse but for improving trading in China.
Diggelmann described the recovery in China as “encouraging.” He reckons it marks the restart of elective surgeries in many other countries too, “especially within the US.” However, recovery in the company’s markets is likely to vary in pace and extent across geographies, he reckons.
Forecast to return to growth
Meanwhile, the company has been doing the usual things in the crisis. That includes reducing costs where it can and protecting its staff from the effects of the virus. Diggelmann assures us that the firm has the financial strength to withstand the uncertain period through the crisis. And the “robust” supply chain will combine with new ways of working to drive revenues as the company’s markets continue to recover.
There’s no forward-looking guidance on earnings for the time being from the directors. But the medium- and long-term outlooks are positive. My guess is that Smith & nephew will return to its gentle growth and expansion trajectory and the valuation will remain ‘reassuringly’ high.
I see this as a high-quality, enduring enterprise and would seek to take advantage of current weakness in the share price. I’d hold for the long term. My guess is that when looking back 10 years from today, I may be glad that I took the risk of picking up a few shares in Smith & Nephew during these troubled times.
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Kevin Godbold has no position in any share 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.