Berenberg ups target price on 'sensible' Smith and Nephew

Analysts at Berenberg increased their target price on medical equipment manufacturer Smith and Nephew on Friday, but noted that the improved earnings growth reported by the FTSE 100 resident in its third-quarter results appeared to already be priced in.

Berenberg, which reiterated its ‘hold’ rating on Smith and Nephew, said the firm’s new commercial structure disclosed at the time of its third-quarter sales, the results themselves and the slight increase in margin guidance had increased its confidence in the group’s earnings outlook, leading it to increase its adjusted earnings per share estimates on S&N by 1-2%.

Although the “sharply positive” share price reaction to these factors led the broker to believe that expectations remained low, with shares now at a 2019E adjusted price/earnings ratio of 17.5x for a 2019-2023E adjusted EPS compound annual growth rate of 8.3%, Berenberg thinks the “improved earnings growth is already somewhat priced in”.

Berenberg said Smith and Nephew’s new commercial structure looked like a “sensible streamlining of what had become a complex and inefficient hierarchy of layer upon layer of management”.

“However, appointing people and un-appointing others is relatively easy and ultimately irrelevant. It is what they subsequently do that counts, and on this front, we remain in wait-and-see mode,“ said Berenberg.

With third-quarter revenues of $1,169m coming within the broker’s $1-2m consensus estimates, bolstered by a 4% underlying growth in reconstruction and a 12% growth in other surgical businesses revenues, and almost nothing of incremental concern, Berenberg said the narrowing of revenue growth guidance to the lower half of the 2-3% range was “unsurprising”, stating it would have taken a “Herculean effort” in the final quarter of its trading year in order to reach the upper end of forecasts.

Berenberg upped its target price on the group from 13.70p to 14.75p.