Goldman downgrades Smith & Nephew on less attractive growth outlook

Goldman Sachs has downgraded Smith & Nephew to 'neutral' from 'buy' and cut the price target to 1,270p from 1,310p as it pointed to a less attractive growth outlook.

Back in March 2015, the bank upgraded the stock to 'buy', mostly on expectations that organic revenue growth across the businesses would accelerate to 5%+, driven by improving execution in wound in particular, as well as continued mid-to-high-teens growth in emerging markets and further shifts towards higher-growth end markets.

At the time, it argued that the acceleration in organic revenue growth and ongoing restructuring would result in improved operating leverage, and hence double-digit earnings growth, which would consequently warrant a re-rating to a Stryker-like multiple.

"However, this acceleration in growth has failed to materialise, as Smith & Nephew has struggled with execution in the advanced wound care business, growth in emerging markets has slowed, and the company has seen some competitive headwinds in the wound care devices and trauma markets, and structural growth headwinds in wound bioactives."

GS noted forecasts 4% average organic revenue growth for 2017-20, which drives a 6% operating income compound annual growth rate and an 8% earnings per share CAGR throughout the forecast period.

"In the context of this outlook, we find the current circa 16x price-to-earnings multiple (2018E) as appropriate, hence our neutral rating."

At 0900 GMT, the shares were down 0.4% to 1,201p.