LONDON -- Topping the FTSE 100
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.
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