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Questor: Smith & Nephew may look expensive at a p/e of 29 but the figure is deceptive

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Operation - knee prosthesis surgery - Michael Buholzer/Reuters
Operation - knee prosthesis surgery - Michael Buholzer/Reuters

The absence of any nasty surprises, after a couple of disappointing updates in 2021, represents a good start to 2022 for Smith & Nephew and this column continues to believe that the orthopaedics, wound care and sports medicine specialist could yet be a beneficiary of anything like a return to normality in hospitals as and when the pandemic finally wanes.

While we are still nursing a small paper loss in the wake of our initial study in March last year, our patience could yet pay off, especially as the shares seem to be gathering a little momentum. A 3.3pc year-on-year gain in sales may not sound much. But currency movements shaved 2.8pc off the top line between January and March and all three of Smith & Nephew’s units showed growth.

Sports medicine led the way once more with a 6.1pc rate of advance on a stated basis, followed by advanced wound management at 5.1pc and orthopaedics at 0.3pc, where hip implant revenues fell, as if to re‑emphasis the potential when elective surgery volumes really start to recover.

New chief executive Deepak Nath stuck to the company’s guidance script as he targeted underlying revenue growth (excluding currency movements) of 4pc to 5pc for this year and an increase in operating margins of half a percentage point relative to last year’s underlying figure of 18pc.

Smith & Nephew continues to target an operating margin of 21pc by 2024, with further improvements after that, as outlined in the strategy for growth put forward by former boss Roland Diggelmann in December.

Analysts and shareholders will now look to Dr Nath and his new colleagues to start delivering on the planned margin expansion in spite of the challenges posed by higher input and logistics costs.

Higher volumes would be a big help on this front. Hip and knee replacements and other surgical procedures have been crowded out by the virus at busy hospitals and new variants have delayed the recovery in volumes. Smith & Nephew could therefore get a boost when the virus is finally beaten off.

The arrival of Dr Nath from Siemens Healthineers and talk of enhanced cash returns from the company also seem to be providing support to the share price. After declaring an unchanged full‑year dividend of $0.3750 for 2021 alongside February’s full-year results, management highlighted what it called a progressive dividend policy and launched a share buyback programme.

Smith & Nephew has not usually been an enthusiastic purchaser of its own stock, although it did run share buybacks of some size in 2007, 2013 and 2016.

Over the past 20 years the firm has preferred to reward investors with dividends: total distributions over the period have come to $3.8bn (£3bn), compared with $1.8bn of buybacks. A forecast yield of just over 2pc may not catch the eye of income seekers and a forecast price-to-earnings ratio of almost 30 may not immediately attract value hunters either. But the latter may be deceptive.

If Smith & Nephew achieves the financial targets laid down for 2024 in its strategy for growth, earnings per share could conceivably reach something like 70p. That would put the stock on a forecast p/e ratio of less than 19, a substantial discount to major American rivals such as Stryker.

Smith & Nephew could yet be a runner. Hold.

Questor says: hold

Ticker: SN.

Share price at close: £13.03

Update: Nichols

Sugar taxes, a war in Yemen, the pandemic and carbon dioxide shortages have all been thrown at Nichols since our first study of the soft drinks specialist in January 2018. Inflation and rising input costs now add to the list of challenges.

As a result we are sitting on a small paper loss, although 151.9p a share in dividends mean we almost break even and we can therefore afford to sit and wait, especially as the Vimto maker has net cash on its balance sheet.

Last month’s trading update showed a post-lockdown 29pc jump in sales and management stuck to its guidance for the year. Nichols still has chance to sparkle. Hold.

Questor says: hold

Ticker: NICL

Share price at close: £13.50

Russ Mould is investment director at AJ Bell, the stockbroker

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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