Professional investors can be a twitchy breed in the best of times. After all, sometimes only a couple blown-up positions separate you from a nice fat bonus or a nice fat kick in the rear out the door. Already nervous about the prospects for future pricing in the orthopedic sector, investors did not react well to Smith & Nephew's (NYSE:SNN) announcement yesterday that it was revising its guidance modestly lower.
Not only did shares of the British orthopedic company get hit to the tune of about 6%, but also it sent a chill through the sector. Biomet (NASDAQ:BMET) held up the best, losing about 2%, but Zimmer (NYSE:ZMH), Stryker (NYSE:SYK), and Wright Medical (NASDAQ:WMGI) all lost about 3% or more on Tuesday.
Smith & Nephew revised EPS growth expectations down to 12% to 13%, a few percentage points lower than prior guidance. The culprits appear to be the knee and wound management business. Management stated that the combination of new products from competitors and the impact of Hurricane Katrina would trim about 1% from the knee business. Looking at wound management, it would appear that distributor inventories are to blame for a 1% to 5% revision in growth.
While the magnitude of the guidance shift isn't that large, investors have been concerned about pricing in the orthopedic sector for some time now. The entire sector has benefited from pretty strong pricing, but that appears to be changing as hospitals hold the line on price increases and, in some cases, have actually been able to secure discounts from manufacturers.
Looking overseas, the Japanese government has apparently managed to squeeze Zimmer a bit more than expected with respect to price cuts. Domestically, HCA (NYSE:HCA), the largest hospital chain in the U.S., has implemented a squeeze play of its own -- looking to limit the number of suppliers it deals with and forcing them to make price concessions or face being excluded entirely. Although HCA's size may give it an unusual degree of leverage, there are concerns that this could be the beginning of a switch in power from the companies to the customers -- something that might not bode well for future price hikes.
With concerns simmering about the whole sector, this might be a good time for investors to work on their due diligence and target a company or two for purchase if sentiment gets a bit excessively negative. I'd personally probably look first at Biomet or Stryker, but in light of the fact that I own Johnson & Johnson (NYSE:JNJ) already and JNJ's DePuy is a major orthopedics company, I'll probably be standing pat.
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Fool contributor Stephen Simpson owns shares of Johnson & Johnson. The Fool has a strict disclosure policy.
