Since I last recommended the shares in December, medical equipment manufacturer Smith & Nephew (LSE: SN) has seen its share price surge 11%. That’s quite a performance from a relatively stable FTSE 100 company within just three months. So what now? Is this global medical technology business still a buy after its recent gain?
Currency headwinds
Last month the group issued its full year results for 2016 and, truth be told, I found them a little disappointing. Group revenues came in at $4,669m, an increase of just 1% on a reported basis and 2% on an underlying basis. This was largely due to foreign currency and disposal-related headwinds. However, there were encouraging performances in areas such as Sports Medicine and Knee Implants, where its products maintained strong momentum.
Market conditions in China and the Gulf States were particularly challenging during the first six months of the year, but China did return to growth, as did Emerging Markets as a whole during the second half of the year. Management have acknowledged the rather subdued performance, but are confident of a stronger performance this year, anticipating underlying revenue growth of between 3%-4% for 2017.
Ageing populations
My view on Smith & Nephew hasn’t changed. Ageing populations in developed markets and improving incomes in emerging markets should contribute to continued volume growth in all of the company’s businesses. Furthermore, healthcare systems and hospital infrastructure in the developing world is improving at the considerable pace, which should help the group’s sales over the longer term.
Personally I view Smith & Nephew as a fairly defensive business, with plenty of opportunity for further growth both in developed nations and emerging markets, albeit at a slow but steady pace. The shares trade on a P/E rating of 18.1 falling to 16.5 by next year, which isn’t too demanding for a high quality blue-chip like Smith & Nephew.
Good start to the year
Meanwhile, another healthcare firm whose shares have been performing well recently is UDG Healthcare (LSE: UDG). The Dublin-based group has made a good start to fiscal 2017 with operating profits for the first quarter well ahead of last year, driven by continued growth and the impact of acquisitions.
In its first quarter update the group said that its Ashfield business, which commercialises services for the pharmaceutical and healthcare industry, traded well ahead of the same period last year. Growth was supplemented by acquisitions, such as STEM Marketing which it acquired in October. In its Sharp packaging services business operating profits were moderately ahead of last year, with the Aquilant sales & marketing business remaining in line with the same quarter last year.
Strong growth is set to continue with consensus forecasts predicting a double digit rise in earnings in each of the next two next two years, but still leaving the shares on a premium P/E rating of 23 for FY 2018. I see UDG as a riskier play than Smith & Nephew, but one that could reap higher rewards if the strong growth continues.
