Smith & Nephew shares fall on Berenberg downgrade

Smith & Nephew’s shares fell on Thursday as Berenberg downgraded the stock to ‘hold’ from ‘buy’ and cut the target price to 13.40p from 14.85p.

“Smith & Nephew has gradually de-emphasised its slower growth areas and implemented various cost-savings measures, reinvesting the proceeds in faster growth areas of the business,” according to Berenberg.

“However, the success of this strategy has been largely offset by various missteps and one-off headwinds, a trend we expect to continue.”

Berenberg said it has become more cautious about the medical equipment manufacturing company’s organic revenue growth.

While the broker expects earnings growth to accelerate to 12% in 2017, three percentage points of it is dependent on a yet-to-be announced buyback, which is far from certain.

“Hence we no longer expect a large enough inflection in earnings growth of sufficient quality to drive the stock higher and reduce our rating to ‘hold’.”

Berenberg added that it believes Chinese destocking, a slowdown in oil states, share losses in Wound Care and a weak hip business are all hampering growth.

“Other parts of the business, such as Knees and Sports Medicine Joint Repair, are continuing to trend well, in our view, but when more than 40% of sales are either declining or virtually stagnating, as we expect to be the case in Q3 2016, it is hard for the group to deliver the mid-single-digit revenue growth that we think is needed to: a) drive operating leverage; and b) satisfy shareholders.”

Berenberg said it thinks revenue growth and the pace of margin expansion are likely to fall short of investor expectations in the next 12 to 18 months.

The broker said an eventual emergence of a bid for the company seems likely but it has now been 48 years since the idea was first appreciated when Unilever tried to acquire the firm so it might be “a long time coming”.

Shares dropped 2.60% to 1,223p at 0935 BST.