Smith and Nephew (SN)

In today’s blog I look at the investment case for Smith and Nephew, a FTSE 100 pharmaceutical giant with a market cap of £14,730 million. Since 2015 the stock has returned over 90% and continues to look attractive going forward. It may not provide the super growth that AIM stocks could potential deliver, but it does provide diversification for your portfolio to balance out risk of investing in small- and mid-cap companies.

DEMAND

The company has three sectors that it specialises in which are orthopaedics, sports medicine and advanced wound treatment. For example, this includes equipment used in operations for knee replacements and rotator cuff repair.

The demand for these business sectors should continue to grow regardless of UK economic conditions, as healthcare is of increasing importance. This is supported by the global trend which can be seen in developing countries such as the US, Smith and Nephew’s highest market by revenue, are moving towards an aging population. This puts greater strains on the need for healthcare as people start to become increasingly reliant on medicine and surgeries to maintain their standard of living, such as the knee replacement mentioned to ensure mobility in later life. 

This is why, arguably, economic conditions will unlikely influence whether a customer would obtain the products and services on offer by Smith and Nephew. For example, would a patient factor in global political or economic conditions in the decision making progress if they were to get a knee replacement that they needed to ensure mobility? It would certainty be less than a luxury good, such as a new car. This therefore highlights that revenues going forward should be predictable, and provide a steady growth to the company. 

This contributes to the reason as to why healthcare companies are defensive in nature. They are generally not influenced by marco-economic conditions and instead derive most of their revenue and growth from whether they can find the next drug or medical technology breakthrough.  

Moreover, looking specifically at Smith and Nephew, the company has an operating margin of 17% and  a return on capital of 27% in 2018, highlighting solid business foundations in place to be able to capture growth moving forwards.  

GLOBAL MARKET

In relation to current economic uncertainties stemming from certain political environments, such as China and the UK, Smith and Nephew provides good cover against these uncertainties as the majority of revenue in 2018 was produced in the United States, resulting in $2,354 million which accounts for almost 50% of total firm revenue of $4,904 million. 

This is a beneficial way of reducing the risk in a portfolio as it decreases the reliance on one market. Therefore, the value of the overall portfolio is less correlated to market fluctuations in one country, such as the domestic market of the UK, due to geographical diversification.  

ADDED 'VALUE'

I normally look for stocks that perform well in terms of capital growth as they can arguably achieve greater returns. For example, when you compare previously mentioned AB Dynamics share rise of 1,451% since 2015 to Smith and Nephew 90% you can understand why. However, Smith and Nephew offers something that most growth stocks don’t, a robust progressive yield. 

This is a strong and balanced approach to support the growth investment strategy, providing both steady growth year on year, along with a rising dividend. I also personally find that several income stocks such as Smith and Nephew and HSBC in your portfolio can bolster cash generation for future investments. This is why I think Smith and Nephew looks an attractive stock going forward, providing a steady growth to your portfolio whilst also provide income generation.