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Get hip to Smith & Nephew's investment appeal, Goldman advises

Published: 10:36 25 Nov 2016 GMT

X-ray of hip
Hip Implants revenue growth was flat
Goldman Sachs has lowered its earnings estimates for Smith & Nephew PLC (LON:SN. but still rates the medical technology company’s shares a ‘buy’.

The estimate changes follow the third quarter trading update earlier this morning and recent exchange rate movements, and see this year’s earnings per share (EPS) forecast decline 3%, while EPS estimates for the next three years have been shaved by 8%, reflecting weaker growth patterns in the third quarter.

“While organic revenue growth this year has fallen short of our expectations (we now expect Smith & Nephew to deliver 1.9% organic revenue growth in 2016, down from the 5% that we had forecast at the beginning of 2016, with the slowdown driven largely by China and the Middle East), we continue to believe that SN.L will accelerate organic revenue growth into the 4%-5% range in 2017 and beyond, given its geographic and product mix (>50% of revenues is in higher-growth markets) and a number of upcoming product launches (Renasys Touch and Connect, Navio in total knee, revision hip, and WereWolf),” the heavyweight US investment bank said.

The next catalyst for the share price is likely to be the appointment of a chief financial officer, expected before the end of the year.

Goldman’s lowered its price target to 1,310p from 1,370p, on the assumption that Smith & Nephew will trade around 18 times projected EPS for 2018; it currently trades at 15.4 times 2018 EPS, whereas sector peer Stryker Corporation (NYSE:SYK) trades on an earnings multiple of 17.4, despite a comparable growth outlook.

Goldman deems the disparity as unwarranted, and in fact suggests S&N should trade at a premium to Stryker, thanks to the possibility of being taken out by a competitor.

 

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