Smith & Nephew (LSE: SN) reported 4% growth in revenue in the second quarter as sales picked up after a slower first quarter. Unfortunately, profits didn’t follow as pricing pressure, restructuring and acquisition costs, and investment in sales and R&D resulted in operating profits sliding 10%.
Adjusted earnings — which management helpfully adjusts for supposed one-time costs — were up very slightly to 18p.
As has been the case recently, Smith & Nephew’s results were a tale of two businesses. The company’s legacy hip and knee replacement operations continue to struggle as health concerns around metal-on-metal hip joints and competitors beating the company to market with newer and shinier knee models take their toll. The economic pains in Europe also don’t help.
Better news came from the Advanced Wound Management division — focused on treating chronic wounds like those suffered by diabetes patients — which reported sales up 30% (still up 10% even if we back out gains from an acquisition made in the last year).
Emerging markets also provided relief as sales to these countries were up 16% — the third consecutive quarter of double-digit growth.
Management has outlined wound management and emerging markets as the company’s growth drivers going forward, so this quarter’s successes are encouraging. However, these two categories only make up 31% and 13% of the company’s revenue, respectively, which means investors would like to see some recovery in the joint-replacement department.
In the meantime, the company’s new plan to return more cash to shareholders via a higher dividend payout — the interim dividend was raised 5% — and share buybacks — $75 million of the planned $300 million has been spent so far — has apparently pleased the market.
Smith & Nephew currently trades near its all-time highs although a price-to-earnings ratio around 15 doesn’t look too stretched.
The medical device industry is attractive because high barriers to entry mean companies can demand premium pricing and the world demographics — rapid aging and growing incomes — indicate a growing target market.
However, the real growth for Smith & Nephew will come from delivering on its efforts to tap into the lower-income, but faster growing markets like Brazil, India, and Turkey. The question is, can it do so profitably?
If you’re undecided about Smith & Nephew’s chances, but are looking to invest in growth opportunities you should read this free report on The Motley Fool’s favourite growth share for 2013.
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> Nate does not own shares of Smith & Nephew. The Motley Fool owns shares of Smith & Nephew.
