Smith & Nephew plc
) reported earnings per share (EPS) of 15.8 cents or EPADS of 79
cents in the fourth quarter of 2012 compared with EPS of 15.6
cents or EPADS of 78 cents in the prior-year quarter. However,
after adjusting for one-time expenses, the company recorded
adjusted EPS of 21.6 cents or EPADS of $1.08 in the fourth
quarter, missing the year-ago EPADS by a penny. However, the
adjusted results were ahead of the Zacks Consensus Estimate
(EPADS) of $1.05.
Full-year 2012 adjusted EPS inched up 2% from the prior year
to 75.7 cents or EPADS of $3.79, at par with the corresponding
Zacks Consensus Estimate.
Revenues were $1,077 million in the quarter, up 3%
(underlying, after considering currency translation) year over
year, and surpassing the Zacks Consensus Estimate of $1,069
million. On a reported basis, revenues dropped 3% due to the
Bioventus transaction (5%) and currency headwinds (1%).
Annual revenues improved 2% on an underlying basis to $4,137
million in 2012, edging past the Zacks Consensus Estimate of
$4,134 million. On a reported basis, revenues declined 3% due to
currency headwinds (2%) and the impact of the Bioventus
On a regional basis, during the reported quarter, revenues
from the U.S., Other Established Markets and Emerging and
International Markets recorded underlying growth of 1% ($415
million), 2% ($529 million) and 14% ($133 million), respectively.
Although the macroeconomic environment in Europe dragged the
company's performance in Established Markets, impressive growth
in Emerging and International Markets was led by robust sales in
the Chinese market (up 30% year over year).
Smith & Nephew's business framework comprises two
divisions - Advanced Surgical Devices ("ASD") and Advanced Wound
ASD recorded revenues of $797 million with underlying growth
of 3%. Within this business, Smith & Nephew experienced 1%
growth in the U.S. Despite healthy growth in Japan and Australia,
performance in other Established markets remained flat on a
year-over-year basis as the situation in Europe continues to
remain an overhang. Maintaining the momentum, the company
recorded 16% growth in the Emerging and International
While the knee implant business reported 2% rise globally,
against the market growth rate of 3%, revenues from the hip
implant franchise increased 3% (down 2% including the BIRMINGHAM
HIP Resurfacing system) against market growth rate of 2%. Pricing
pressure across these segments remained unchanged compared with
the previous quarters at (2%) (including the effects of the
biennial price reduction in Japan), partially offset by mix
Smith & Nephew recorded 7% growth in its sports medicine
joint repair franchise, while arthroscopic enabling technologies
remained flat on a year-over-year basis. The Trauma business
recorded 7% growth, ahead of the market growth rate of 3%.
AWM recorded growth of 4% (underlying) year over year to $280
million in the quarter against an estimated flat market. Revenues
in the U.S. remained flat on a year-over-year basis. The company
witnessed 4% growth in the Established Markets despite softness
across Europe. The Emerging and International Markets recorded
Smith & Nephew recorded 1% growth in Exudate Management,
while Infection Management revenues declined 6% year over year.
The Negative Pressure Wound Therapy ("NPWT") portfolio continued
to perform well as the company increased investment in the
Gross margin contracted 10 basis points (bps) year over year
to 73.1% in the quarter. The company witnessed a 4.9% drop in
selling, general and administrative expenses to $528 million and
a 12.2% rise in research and development expenses to $46 million.
However, operating margin expanded 50 bps to 19.8% in the
quarter. Overall, trading margin (operating margin after taking
into account one-time transactions) increased marginally by 10
bps to 25.3%.
Among the segments, ASD trading margins improved 70 bps on the
back of restructuring efforts. However, the trading margin at AWM
unit recorded a contraction of 210 bps due to higher investment
to support portfolio expansion and unfavorable product mix.
Smith & Nephew hiked its interim dividend payment by 50%
to 16.2 cents per share (81 cents per ADS). This increases the
annual dividend to 26.1 cents per share in 2012, reflecting the
company's commitment to return value to shareholders with strong
cash generation capabilities.
Notably, the company's increasing focus on AWM franchise is
paying off. We are encouraged to note the gradual stability in
the U.S. market, though the challenging scenario in Europe
continues to be an overhang. Apart from expansion of its
portfolio, the company is also working on cost-saving initiatives
that are yielding results. We are also encouraged by the
company's focus on emerging markets. However, pricing pressure
continues to remain a major headwind.
Accordingly, the stock carries a Zacks Rank #3 (Hold). While
we prefer to remain on the sidelines for Smith & Nephew,
other medical stocks such as
), carrying a Zacks Rank #1 (Strong Buy) are expected to do well.
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