A Medical Marvel

LONDON -- Topping the FTSE 100 (INDEX: ^FTSE  ) leaderboard of elite British companies this morning is Smith & Nephew (NYSE: SNN  ) , the global medical technology business. As I write, S&N shares are up nearly 4% at 627 pence, which values the group at 5.6 billion pounds.

Joints and wounds
Unless you've had a nasty sports injury or joint problem, you may never have used a Smith & Nephew product. Nevertheless, this high-tech medical company has built up market-leading positions in five key clinical areas:

  • Orthopedic reconstruction
  • Advanced wound management
  • Sports medicine
  • Trauma
  • Clinical therapies

In short, S&N is best known for its knee and hip implants, arthroscopic equipment (for keyhole surgery), and wound pads. Given the technical and regulatory difficulties of entering these medical markets, S&N has a wide competitive moat around its business, which generates high margins.

In other words, S&N is the kind of well-run business that U.S. super-investor Warren Buffett likes to own. What's more, this medical marvel is also a favorite of Britain's own super-investor, Neil Woodford.

As we revealed in March, Woodford started buying shares in Smith & Nephew in the second half of 2011. Woodford paid an average price around 564 pence a share, so he's up more than 11% today. Nice work, Neil!

Good growth
This morning S&N released its results for the first quarter of 2012, which it described as "a good first quarter."

In the first three months of this year, revenue climbed to $1.08 billion, up 3% on Q1 2011. S&N has two core divisions: In "Advanced Wound Management," revenue grew by 5% to $240 million, while the "Advanced Surgical Devices" arm, up 3%, brought in $839 million.

Trading profit rose by 5% to $252 million, with S&N's operating margin rising by 0.5 percentage points to a healthy 23.3%. As a result, earnings per share rose to $0.18 from $0.175 -- up nearly 3%.

What's more, S&N's high margins and strong cash flow allowed it to reduce net debt to a mere $28 million, down a whopping 92% from $351 million a year earlier. Thus, S&N will soon have net cash, making it a rare beast among FTSE 100 firms.

A great British business
Commenting on these results, S&N chief executive Olivier Bohuon said:

Smith & Nephew has had a good first quarter. We grew revenue, increased profit and improved our trading profit margin. We saw the first results of our actions to make Smith & Nephew more fit and effective. 2012 is a critical year for implementing our new strategic priorities. Our plans to progress the structural changes, additional investments and, of course, greater efficiencies, are now under way. Throughout Smith & Nephew, at every level, there is a clear sense of direction, as we work to reshape the Group for future growth.

I rather like the look of Smith & Nephew, despite it not being the typical value or high-yield share that usually catches my eye. That's partly because of its global grasp: S&N has nearly 11,000 employees, a presence in 90-plus countries, and annual sales approaching $4.3 billion in 2011.

Delving into its fundamentals, at today's price of 627 pence, Smith & Nephew trades on a forward price-to-earnings ratio of 12.4 and offers a prospective dividend yield of a modest 1.8%, covered 4.3 times over.

While these aren't classic value indicators, S&N is a quality business -- and both of its core divisions are growing their revenues, profits, and trading margins. Thus, I'm adding Smith & Nephew to my personal watchlist as a quality/growth play. Who am I to argue with Neil Woodford, Britain's best investor?

To gain more insight into the mind and methods of Britain's most-admired fund manager, download our special report, "8 Shares Held By Britain's Super Investor." You can find out what Neil Woodford's is buying this year.

Further investment opportunities:

Cliff does not own any of the shares mentioned in this article. The Motley Fool owns shares in Smith & Nephew. Motley Fool newsletter services have recommended buying shares of Smith & Nephew. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that
considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1878268, ~/Articles/ArticleHandler.aspx, 4/20/2014 10:31:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement