On Monday, Canaccord Genuity adjusted its outlook for medical equipment manufacturer Smith & Nephew (NYSE: SNN), reducing the price target from $32.00 to $27.00 while keeping a Hold rating on the stock. This move follows the company's third-quarter results, which were released on Sunday and a subsequent discussion with the company today.
Smith & Nephew faced a challenging quarter, missing revenue projections and revising its 2024 and 2025 financial guidance downwards. The primary issues affecting the company's performance were identified as stemming from its operations in China, where it encountered significant headwinds.
Firstly, the China Volume-Based Procurement (VBP) program has been affecting the pricing in the Sports Medicine segment without the anticipated increase in volume. Secondly, Smith & Nephew's surgical businesses have been impacted by reduced orders from distributors in China.
The company's revenue recognition process in China, which depends on distributor sales rather than direct usage, coupled with a lack of visibility on end-customer demand, has complicated its market strategy. Smith & Nephew anticipates these challenges in China to persist into 2025, with the VBP program expected to complete its first year in May and uncertainty surrounding the recovery timing from distributor-related issues.
As a result of these setbacks, Smith & Nephew has lowered its full-year 2024 growth guidance to approximately 4.5%, a decrease from the previously forecasted 5.0-6.0%, which translates to a reported growth of 4.1%. The company's trading margin growth for FY24 has also been revised, now expecting an increase of up to 50 basis points from 2023's 17.5%, a downgrade from the previously anticipated minimum of 18.0%. For 2025, the trading profit margin is now projected to fall between 19.0% and 20.0%, down from the previous expectation of over 20%.
In light of these developments, Canaccord Genuity has maintained its Hold rating for Smith & Nephew but has lowered its price target to reflect the updated financial forecasts and the ongoing challenges in the Chinese market.
In other recent news, Smith & Nephew, the global medical technology company, reported a 4% underlying revenue growth in its third-quarter trading update, bringing in $1.4 billion in revenue. This growth was positively impacted by improved U.S. recon growth due to operational enhancements. However, the company faced challenges in China, particularly in its surgical businesses, which affected overall growth and led to a downward revision in full-year growth expectations to approximately 4.5%, down from the previous 5% to 6%.
Despite these challenges, the company expects a trading margin expansion of up to 50 basis points, with a long-term target of 19% to 20% by 2025. Innovative product launches are anticipated to contribute significantly to revenue growth in the coming years. However, Smith & Nephew remains cautious about the Chinese market, expecting a recovery by 2025.
On the analyst front, concerns have been raised about market share loss in China due to local competition and lower-than-expected volume growth. Despite this, the company's trauma franchise is showing double-digit growth, driven by the EVOS system. Management remains confident in their 12-Point Plan, expecting significant margin expansion by 2025.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Smith & Nephew's current situation. The company's market capitalization stands at $10.79 billion, with a P/E ratio of 35.4. This relatively high P/E ratio aligns with one of the InvestingPro Tips, which notes that SNN is "Trading at a high earnings multiple." However, when adjusted for the last twelve months, the P/E ratio drops to 20.05, suggesting a more moderate valuation.
Despite the challenges outlined in the article, particularly in the Chinese market, InvestingPro Tips indicate that "Net income is expected to grow this year" and "Analysts predict the company will be profitable this year." These insights suggest that despite the downward revision in guidance, there may still be potential for financial improvement.
The recent market reaction to Smith & Nephew's challenges is reflected in the InvestingPro Tip stating that the "Stock has taken a big hit over the last week," with data showing a 1-week price total return of -12.51%. This decline has pushed the stock near its 52-week low, potentially presenting a value opportunity for investors who believe in the company's long-term prospects.
For those interested in a more comprehensive analysis, InvestingPro offers 11 additional tips for Smith & Nephew, providing a deeper understanding of the company's financial health and market position.
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