The Smith & Nephew (LSE:SN) share price was down heavily in early trading this morning. That’s despite the medical technology business revealing a huge jump in revenue over the last quarter. What gives?
Smith & Nephew’s share price tumbles
I’d feel a little hard done by if I held SN shares today.
Revenue rocketed a little under 43% to $1.34bn over the three months to 3 July. As one might expect, all of the company’s franchises — orthopaedics, advanced wound management, and sports medicine & ENT — “delivered strong growth” compared to last year as delayed elective surgery procedures finally went ahead.
Importantly, the last two of these logged underlying revenue growth compared to the same period in 2019 and before coronavirus reared its ugly head. The same goes for SN’s hugely important US market.
All this brought SN’s revenue over the first half of 2021 to $2.6bn — up 27.8% on the same period in 2020. From a loss of $5m last year, operating profit recovered to $239m.
According to CEO Roland Diggelmann, this rebound (and the contribution from new products and acquisitions) puts the company in “a strong position” as Covid-19 is finally knocked for six.
No change to guidance
I wonder if the negative reaction is partly down to the company electing not to alter its full-year guidance.
Today, Smith & Nephew said that it is still looking to grow underlying revenue by between 10% and 13% in 2021. A profit margin of 18%-19% is also being targeted, based on the assumption that Covid-19 will become even less of an issue going forward.
On top of this, some supporters may also be concerned about talk of profit margins being impacted by, among other things, higher logistics/freight costs and increased investment relative to before the pandemic.
In line with not changing guidance, management also revealed that the interim dividend would be maintained at 14.4 cents (10p). There are a couple of ways to look at this. One would be not to look a gift horse in the mouth. Dividend streams are never guaranteed and so receiving a stable payout is far better than not receiving one at all.
On the other hand, it’s not difficult for me to find other companies from the FTSE 100 offering far more income. One such candidate also reported to the market today.
A cautious buy?
Back in April, I was bullish on Smith & Nephew’s ability to recover from the pandemic and regarded the shares as a decent contrarian option for my portfolio. I don’t see anything today to alter my view on the company. Having said this, a near-8% fall in the share price is clearly not ideal.
Are there better growth opportunities in the market? I think so. Then again, SN’s line of work is relatively defensive. This could offer a way for me to balance out my racier stock picks. As always, it’s important to understand that I can’t control what the market does next. All I can do is buy shares that, collectively, could/should allow me to hit my financial goals at an appropriate level of risk. And that risk varies greatly between investors.
While today’s tumble in the Smith & Nephew share price will leave existing holders licking their wounds, I think it’s important to focus on where the stock will be in, say, five years, not five months. I think this is still a decent buy for my portfolio.
