ii view: Smith & Nephew repairs damage with better results

Full-year results to 31 December

• Adjusted revenue up 5.3% to $5.8 billion (£4.6 billion)
• Trading profit up 8.2% to $1.05 billion (£829 million)
• Trading profit margin of 18.1%, up from 17.5% in 2023
• Final Dividend of 23.1 US cents
• Total full-year 2024 dividend payment unchanged at 37.5 US cents per share
• Net debt excluding lease liabilities flat at $2.5 billion

Guidance:

• Expects full-year 2025 adjusted revenue growth of around 5%
• Trading profit margin of between 19% and 20%

Chief executive Deepak Nath said:

"Smith & Nephew's transformation remains on track with the 12-Point Plan increasingly delivering better financial performance. Revenue growth is consistently above historical levels following operational and commercial improvements. 

"There is much more to be done, but we have made solid progress fixing the foundations and expect a step-up in returns in 2025, including significant margin expansion. We are confident that this will be the year when transformation starts to unlock substantial value for our shareholders."

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ii round-up:

Medical equipment maker Smith & Nephew (LSE:SN.) today detailed annual sales and profits that beat City forecasts, driven by an ongoing transformation plan and improved demand for knee and hip replacements in the US. 

Adjusted revenues rose 5.3% in 2024 to $5.8 billion (£4.6 billion), aiding an 8.2% rise in trading profit to $1.05 billion. That was 1% and 2% ahead of analyst forecasts respectively, with the adjusted profit margin for 2025 expected to rise as high as 20% from 2024's 18.1%.

Shares in the FTSE 100 company slumped in October when it lowered its full-year revenue growth forecast. But they've recovered since and are up 8% in UK trading Tuesday having come into these latest results down by 8% over the last year. That’s better than an 18% fall by rival Zimmer Biomet Holdings Inc (NYSE:ZBH), although in contrast to a near 13% gain for the FTSE 100 index over that time.

Smith & Nephew operates across the three divisions of Orthopaedics, selling replacement hip and knees, Advanced Wound care items, and Sports Medicine and ENT offering products to repair or remove soft tissue. Under CEO Deepak Nath, the Watford headquartered company has been pursuing a 12-point plan to improve efficiency and performance. 

Fourth-quarter adjusted sales rose 8.3% to $1.57 billion, up from third-quarter growth of 4%. Underlying US growth of 5.4% and 7.6% for knee and hip implants respectively more than countered a near 3% retreat for China sales. 

A focus on innovation had resulted in the launch of nearly 50 new products over the last three years, while ongoing efficiency gains include a near 9% reduction in employees over 2023 and 2024.  

A final Dividend of 23.1 US cents per share, payable to eligible shareholders on 28 May, leaves the total 2024 payment unchanged from 2023 at 37.5 US cents per share. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. A first-quarter trading update is scheduled for 30 April. 

ii view:

Started in Hull in 1856, Smith & Nephew today employs around 18,000 people. Orthopaedics generated its biggest slug of sales over 2024 at 40%, followed by Sports Medicine & ENT at 31% and Advanced Wound Management the balance of 29%. Geographically, the US accounted for the bulk of sales during 2024 at 54%. China came in at almost 4% of sales with the UK a similar amount. 

For investors, headwinds focused on Sports Medicine Joint Repair and Reconstruction have hindered its China business. Previous attempts to kick start growth have proved mixed. Currency movements can hinder, costs for businesses generally remain elevated, while the dividend payment again remains unchanged, if sat on a yield of close to 3%. 

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To the upside, management’s transformation push continues. A focus on innovation has seen more than 60% of revenue growth in 2024 coming from products launched in the last five years. Diversity in both products and geographical regions exists, while adjusted group net debt remained flat at around $2.5 billion.  

For now, and despite continued risks, an analyst consensus fair value estimate above £12 per share for this play on ageing demographics looks to give grounds for longer-term hope.

Positives: 

• Product and geographical diversification
• Exposure to favourable demographics

Negatives:

• Falling China sales
• Subject to currency headwinds

The average rating of stock market analysts:

Buy