EUR 850.00 For Business Accounts Only

Morningstar | SNN Updated Forecasts and Estimates from 09 Oct 2018

Smith & Nephew continued to tread water in the first half of 2018, which is not far off from our expectations, especially after management pulled back on its outlook after the first quarter. We’re holding steady on our valuation. Nonetheless, second quarter provided our first opportunity to hear from new CEO Namal Nawana and his preliminary thoughts on key priorities for the firm. We like what we’ve heard from him about improving execution by focusing on customers (and end-patients). However, we remain skeptical that Smith & Nephew, as a smaller, midtier competitor, can overcome the high switching costs that have historically kept market share shifts minimal in orthopedics. We think this dynamic is exacerbated by how hospitals have actively sought to reduce vendors, which tends to favor the larger competitors such as Zimmer Biomet and Stryker, at the expense of smaller rivals, including Smith & Nephew. This is the main reason we continue to view Smith & Nephew’s moat trend as negative.

Having said that, we strongly suspect new management’s thoughts on flattening the organizational structure and decentralizing some of the decision-making to those who are closer to the customers should improve Smith & Nephew’s ability to execute and leverage some of its key technologies that are differentiated. The firm’s organizational structure has long been top heavy, from our perspective, based on sales and administrative costs that significantly exceeded the firm’s size, compared with key rivals. Nawana has already eliminated some layers within personnel and we expect more accountability among the employees should set the stage for greater productivity. Nonetheless, even if internal incentives are aligned, we think some of the structural challenges remain. It’s unclear to what degree better execution can overcome the other obstacles. We wouldn’t be surprised to see greater volume within current accounts and ongoing challenges in penetrating competitive accounts.