HSBC has revised its outlook on Smith & Nephew (SN), downgrading the stock rating from "Buy" to "Hold". The investment bank has also adjusted its price target for the company, reducing it from 1,160 GBp to 1,070 GBp. This change comes as HSBC evaluates the medical technology and life sciences sectors under various economic scenarios, including stagflation and a weak macroeconomic environment.
The current market sentiment is split between seeing the recent correction in stock multiples as a buying opportunity and fearing it could be the precursor to a broader economic downturn. HSBC's research indicates that, in a stagflation scenario, there could be an additional compression of multiples by 20%-25%, suggesting significant downside risk remains. According to HSBC, the present market valuations do not yet reflect recession conditions, implying further potential declines in stock prices.
Wall Street Analysts Forecast
Based on the one-year price targets offered by 4 analysts, the average target price for Smith & Nephew PLC (SNN, Financial) is $30.28 with a high estimate of $35.00 and a low estimate of $26.13. The average target implies an upside of 12.16% from the current price of $27.00. More detailed estimate data can be found on the Smith & Nephew PLC (SNN) Forecast page.
Based on the consensus recommendation from 5 brokerage firms, Smith & Nephew PLC's (SNN, Financial) average brokerage recommendation is currently 2.2, indicating "Outperform" status. The rating scale ranges from 1 to 5, where 1 signifies Strong Buy, and 5 denotes Sell.
Based on GuruFocus estimates, the estimated GF Value for Smith & Nephew PLC (SNN, Financial) in one year is $32.55, suggesting a upside of 20.56% from the current price of $27. GF Value is GuruFocus' estimate of the fair value that the stock should be traded at. It is calculated based on the historical multiples the stock has traded at previously, as well as past business growth and the future estimates of the business' performance. More detailed data can be found on the Smith & Nephew PLC (SNN) Summary page.
SNN Key Business Developments
Release Date: February 25, 2025
- Full Year Revenue: $5.8 billion, up 5.3% on an underlying basis and 4.7% on a reported basis.
- Q4 Revenue: $1.6 billion with 8.3% underlying growth and 7.8% reported growth.
- Gross Margin: 70.3%, slightly below 2023 due to China headwinds.
- Trading Profit: $1.05 billion, up 8.2% year on year.
- Trading Margin Expansion: 60 basis points to 18.1% for the year.
- Adjusted EPS: $0.843, up 1.7%.
- IFRS EPS: $0.472, significant growth due to lower restructuring charges.
- Free Cash Flow: $551 million, with a 95% cash conversion rate.
- Headcount Reduction: Reduced by around 9% overall.
- ROIC: Improved by 150 basis points to 7.4%.
- 2025 Revenue Growth Outlook: Around 5% with significant trading margin expansion to 19%-20%.
- China Headwinds: 280 basis points of group growth impact in Q4.
- Orthopaedics Growth: 6% in Q4, 8.1% excluding China.
- Sports Medicine and ENT Growth: 7.8% in Q4.
- Advanced Wound Management Growth: 12.2% in Q4.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Smith & Nephew PLC (SNN, Financial) reported a 60 basis points margin expansion for 2024, driven by operational leverage and productivity improvements.
- The company achieved 95% cash conversion, surpassing its target, and reported higher return on invested capital (ROIC) of 1.4%.
- Smith & Nephew PLC (SNN) delivered 8.3% underlying growth in Q4 2024, with strong performance in the US market, which grew by 11.9%.
- More than 60% of revenue growth in 2024 came from products launched in the last five years, highlighting the company's focus on innovation.
- The company has made significant progress in reducing inventory days and improving the quality of its inventory, contributing to better cash flow management.
Negative Points
- China posed a significant headwind, costing 280 basis points of group growth in Q4 2024, and is expected to continue impacting growth in 2025.
- The company faced a 40 basis points drag on gross margin due to the price impact of joint repair VBP in China.
- Smith & Nephew PLC (SNN) anticipates a 25% sales headwind from the expected China VBP process on mechanical resection blades and COBLATION wands in 2025.
- The company's Orthopedics business in China is currently not profitable at VBP price levels, raising concerns about its long-term viability in the region.
- Smith & Nephew PLC (SNN) has experienced market share loss in China, particularly in the orthopedics segment, due to increased competition from local manufacturers.
