RBC sees upside risk to Q4 results at Smith & Nephew

RBC Capital Markets has reiterated its 'outperform' rating on Smith & Nephew ahead of the medical devices giant's fourth-quarter results later this month, saying it sees upside risk to current estimates.

Strong results from sector peers like Johnson & Johnson, Stryker and Zimmer Biomet suggest that the global hip and knee market expanded by a combined 7.1% in the fourth quarter, as surgery levels increased on the back of a "a return to normal phasing and secular growth in demand", RBC said.

"If Smith & Nephew's Ortho revenues have grown in line with the market, this implies up to 1% upside to Q4 group sales vs RBCe/consensus, or more if it takes share," the broker said ahead of the group's scheduled results on 27 February.

Meanwhile, Stryker and Zimmer Biomet also provided strong guidance for 2024 that was ahead of consensus forecasts on both revenues and profits, which could bode well for Smith & Nephew, RBC said.

"We think there is a meaningful chance that management guides to 5-7% growth in FY2024, implying c1% upside to consensus at the midpoint. Higher revenue growth would de-risk consensus forecasts for trading margin (currently 18.4%), which depends largely on operating leverage on volumes," the broker said.

Smith & Nephew's shares have underperformed the wider sector by 10% so far in 2024, which could reflect "nervousness" around hitting margin guidance, RBC said. So the reaction to a strong fourth-quarter result could be strong.

"We also remain bullish on SN in the longer term, and continue to believe its valuation vs peers does not account for its competitive positioning or growth outlook."

The broker has a 1,500p target price for the stock, which was up 0.3% at 1,096p by 0855 GMT.