EUR 850.00 For Business Accounts Only

Morningstar | Smith & Nephew Prepares for More M&A Activity

Smith & Nephew finished up 2018 not materially far off from our projections and we’re leaving our fair value unchanged for now. Similar to previous quarters, large joint implants continued to lag market growth in the fourth quarter. Accounting for roughly one third of total revenue, quarterly knees and hips rose 3% on an underlying basis, which was then whittled down to 1% by foreign exchange headwinds. The main bright spots came in the form of sports medicine, the Navio hand-held orthopedic robot, and the Pico single-use negative pressure wound therapy device. Unfortunately, these products were not enough to boost consolidated revenue growth for the year, which remained at an anemic rate of 2% in constant currency. Despite respectable adoption of the Navio robot, we anticipate tougher competitive conditions as rival Zimmer Biomet prepares to commercialize its own Rosa robot in 2019. Until we have more confidence that Smith & Nephew can fend off pressure from Stryker, which is executing at the top of its game, as well as Zimmer Biomet, which is getting back on its feet, we’re leaving our negative moat trend in place.

We’re still optimistic about the firm’s franchise in sports medicine joint repair, which has consistently been growing in the high-single digits. There are still many opportunities for innovation in this area and Smith & Nephew has been savvy about acquiring emerging technologies that fit well in its existing portfolio, including Regeneten for rotator cuff repair and NovoStitch Pro for repairing the meniscus. Based on management’s comments about strategy, we anticipate Smith & Nephew will be more active in finding smaller tuck-in acquisitions of complementary technologies. With debt/EBITDA at an estimated 1 times, there’s plenty of flexibility for the firm to take on more leverage. Nonetheless, we’re mindful of the risk of overpaying and botched integration in this scenario.