Smith & Nephew (LSE:SN) is a Footsie medical specialist that I’m backing to outperform the market in the coming years. The London-based company makes orthopaedic implants and prosthetics, along with wound dressings and other surgical technologies.
Recent performance
Many companies supplying healthcare providers, such as the NHS, suffered during the pandemic. This was because normal operations were cancelled or postponed as healthcare providers focused on providing emergency treatment for Covid-19 patients. In 2020, Smith & Nephew saw pre-tax profits fall to $246m from $743 in 2019. Then 2021 saw profits double from 2020 to $586m despite record Covid hospitalisations, notably in the UK, during the early part of the year.
However, as we move beyond the pandemic, there’s a lot more optimism around the industry. There are around 6.4m people waiting on elective procedures in England alone. That’s a huge figure, with some people having to wait more than two years to have their procedure. I see two big winners from this situation. The first is private hospitals that will receive extra business from the overloaded NHS, as well as more custom from patients who don’t wish to wait. The second is medical device manufacturers like Smith & Nephew that benefit from a general higher volume of surgeries.
2022 started well for Smith & Nephew despite the impact of the Omicron variant. The company said revenue for the three months to 2 April rose 5.9% to $1.31bn on an underlying basis, above analysts’ forecasts of $1.27bn. The device manufacturer said this left it on track to meet forecasts for the year.
Established markets revenue rose 4.1% on an underlying basis as elective surgery volumes recovered. Meanwhile, there was more growth in emerging markets. Underlying revenue grew 14.3%. The firm registered double-digit growth across India, the Middle East and Africa, and Latin America.
Risks
One of the biggest risks facing S&N is a new Covid variant that may reduce the effective of vaccines in use. A return to the conditions seen in 2020 would be very bad for business. Equally, if Omicron stays with us for the long term, this could impact growth. Infections are still causing cancellations to surgeries, albeit not at the levels seen previously.
Should I buy?
I’ve already bought Smith & Nephew shares and would buy more. I don’t see the share price soaring this year, but in the long term I think it will do well. It will benefit from huge waiting lists, but equally I think it will become increasingly profitable as populations, particularly in wealthier nations, grow older and require more elective surgeries.
It’s not looking particularly cheap with a price-to-earnings ratio of around 19. But I think that’s a fair price considering what I believe to be strong future prospects. The firm is also looking to rebuild its trading margin which will complement growing revenue.
