Smith and Nephew shares are under pressure following what has been described by analysts as an "uninspiring" meeting with the medical group's management.
Credit Suisse analyst Christoph Gretler said the bank was keeping its neutral rating on Smith "having attended a rather uninspiring roundtable with chief executive Olivier Bohuon and chief financial officer Adrian Hennah in London." He said the company faced a number of challenges, with the company more like to make acquisitions that share buybacks. Bohuon - who has been in charge for seven months - said that in the past it did not have a coherent strategy but was run with different strategies for different divisions. He believed it needed major investment in research and development. Gretler said:
Overall, we took away the following key messages: (1) management considers it a mistake to use its strong balance sheet for share buy backs or substantial dividend payout increases at this stage as it sees important merger and acquisition opportunities (e.g. purchase of US market share and biologics in wound care, emerging market infrastructure); Olivier stressed several times that he has an extensive deal making history.
(2) the initiated cost reduction program of more than $150m (details to be announced in February) is more about optimising and redeploying resources and any underlying margin increase in 2012 will be slight (we assume 50 basis points on our estimates);
(3) Smith and Nephew considers its orthopaedic business as currently unstable, orthopaedics products generally as commoditised and poorly differentiated and as such exposed to continued price pressure (now seen even more in the 3%-4% range).
With such key messages, we see the Smith and Nephew investment case as difficult. In light of slow operating earnings growth, increased execution risks, low chances for substantial share buybacks and a reduced likelihood for industry consolidation, we stay on the sidelines.
With the overall market moving higher - the FTSE 100 is currently 47.14 points higher at 5269.74 - Smith and Nephew's shares are down 12p at 562.5p.
They have been supported in recent times by renewed talk that the company itself could be a bid target for rivals such as Johnson & Johnson or Stryker, although not every analyst is convinced by the idea.
