Smith and Nephew Facing Slower Growth
November 6, 2013
Over the past year, most major public medical device companies have fared well, with a few hiccups here and there. That said, the device industry is confronting challenges such as a dip in elective surgery volume, a rise in recalls related to manufacturing defects, the medical device tax, and European austerity measures.
For the hip implant market, Smith & Nephew has fallen behind rivals like Zimmer Holdings and Stryker. For S&N, a number of factors has shaken investor confidence in recent months. In terms of debt, earnings growth and revenue growth, S&N is one of the best-valued companies in the hip implant market.For Smith & Nephew, the company has an operating margin of 20.25% and a net margin of 12.74%. In comparison, Stryker has an operating margin of 15.22% and a net margin of 10.01%. Zimmer Holdings has a whopping operating margin of 28.34% and a net margin of 14.86%.In terms of quarterly year-over-year revenue growth, Smith & Nephew has achieved 7.9%, while Stryker and Zimmer Holdings are both tied in second place at 4.8%.While Smith & Nephew's shares may be less costly than its peers, its weak price performance signals a significant underlying problem.S&N generates a majority of its revenue from advanced surgical devices and advanced wound management. Advanced surgical devices include arthroscopic enabling technologies, sports joint medicine, trauma products and implants. Advanced wound management includes a variety of wound care products.In total, advanced wound management pulled in Q3 revenues of $331 million and advanced surgical devices pulled in Q3 revenue of $696 million. These figures represent year-over-year growth of 12% and 3%, respectively. While wound management comprises one-third of the company's total revenue, advanced surgical devices pull in approximately two-thirds of total revenue.In the advanced surgical devices segment, Smith & Nephew competes directly with Zimmer and Stryker. In particular, S&N competes against these companies in product categories like trauma products, hip implants and knee implants. While S&N was able to land single-digit growth for these three product categories, it may have not been enough to help it keep pace with its competitors. In total, trauma pulled in Q3 revenues of $115 million. Knee implants and hip implants pulled in Q3 revenues of $196 million and $150 million, respectively.In comparison, Stryker reported year-over-year sales growth of $315 million for its knee implants. On top of this, hip implants increased to $304 million, a 5.5% boost. Stryker's trauma products did extremely well, increasing 18.1% to $277 million. For S&N, Stryker's ability to land higher sales growth in the knee / hip / trauma categories could be bad news.Zimmer reported total sales of $481 million for its knee implants, a 4% year-over-year increase. That said, hip implants declined half a percentage point to $338.4 million. Trauma devices also experienced a modest fall of 0.3%, ending up at $74.1 million. For S&N investors, the problem is the same: Zimmer's knee implant segment is double that size of S&N's segment.
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