If George Soros’s London investments unit did, indeed, place a large bet against Smith & Nephew’s share price last month, it’s likely to be regretting that decision now (Miles Costello writes). Shares in the medical equipment maker have rebounded strongly since then, meaning that, unless it exited its short position in time, SFM UK Management will be sitting on a sizeable loss.
It should be said that official filings to the Financial Conduct Authority do not show a disclosable short position in Smith & Nephew for SFM UK Management and the company could not be reached for comment. In truth, though, however well-known the 90-year-old billionaire investor is, what matters more to Smith & Nephew’s wider shareholder base is whether the bear case that inspired the apparent move carries enough weight to cause them concern. The recent rally in the shares suggests that it doesn’t.
Smith & Nephew was founded as a small pharmacy in Hull in 1856 by Thomas Smith, whose nephew took over the business when he died. It is now based in Watford and operates in over 100 countries with more than 17,500 employees. With a market value of just under £13.8 billion, it occupies a position in the FTSE 100 and in its most recent financial year made a pre-tax profit of $743 million on revenues of more than $5.1 billion.
The company operates three divisions. The largest by revenue is orthopaedics, which contains the hip and knee replacements business for which Smith & Nephew is best known. This is followed by sports medicine and ear nose and throat, which among other things makes instruments for use in joint repair work, and advanced wound management, including specialist dressings.
The investment case against Smith & Nephew is driven by Covid-19: a sharp rise in infections, and therefore hospital admissions, means that non-essential operations are put on hold, reducing demand for its products. This certainly was true during the early onset of Covid-19. The company reported a 29.8 per cent decline in revenues to $901 million for the second quarter as knee and hip replacement operations and reconstructive surgery across its markets were put on hold.
Yet as countries began to emerge from their first lockdowns, the recovery was swift. Revenue for the third quarter was still lower compared with the same period last year, but by a far more manageable 3.7 per cent to $1.2 billion. While trading was down in all three divisions, revenue returned to growth in the United States and China, but fell in other markets, including Latin America and India. In short, they moved in line with the impact of the virus.
The second wave of the pandemic will be hitting earnings again, as hospitals prioritise Covid patients. Does this jeopardise the long-term viability of the company? Surely not. The figures for the third quarter show how quickly revenues start to bounce back when viral infection rates reduce and this week’s positive trial figures for a vaccine suggest that it’s only a matter of time before the pandemic is under control.
Smith & Nephew is not guiding about likely revenue for the full year, but it continues to pay a dividend, to develop new products and last month successfully raised $1billion in the bond markets to help to fund its strategic initiatives. It remains plugged into increasing demand for healthcare among an ageing global population.
The shares, off 33½p, or 2.1 per cent, at £15.50, trade for 28.7 times Berenberg’s forecast earnings for a dividend yield of just over 1.7 per cent. This column recommended holding them in April and the long-term argument still stands.
Advice Hold
Why Earnings will recover once the virus is brought under contol and generate respectable returns over time
BAE Systems
Since Tempus last expressed an opinion on BAE Systems nearly four months ago, its shares have soared like one of its Typhoon fighter jets out in the Arabian desert and then dived like one of its Astute submarines hiding in the Atlantic (Robert Lea writes).
It has done this for exactly the Rumsfeldian reasons indicated at the time: the twin known unknowns of how long the Covid-19 pandemic would go on draining the spending power of its two main sponsors, the Pentagon and the Ministry of Defence; and what would happen to defence spending as the result of the presidential election in the United States, where BAE earns nearly half its annual revenue.
Even if the circumstances have changed, the challenges remain the same: a Covid-19 vaccine on the way might shorten the coronavirus economic crisis, but the coffers have been so emptied that military spending may no longer be seen as a priority; and although it appears that we do have a new US Commander-in-Chief-elect, quite how hamstrung he may be with a majority Republican Senate is unclear. Budgets for US military vehicles and warship refits and British exports for fighter jets and frigates matter to BAE.
Meanwhile, life goes on for BAE delivering on the programmes it is on at present and yesterday it said that nothing had much changed since a summer update, with revenue still on track but earnings likely to come in slightly higher thanks to better operational management and a lower tax bill.
That is better for the share price, but in reality a recovery from the seven-year low that the stock had plumbed has been driven by the Covid and American election news.
In the summer, with the shares at 490p, Tempus believed that BAE was a long-time “hold”, whatever the shorter-term potential threats. That opinion hasn’t changed. Buy-on-weakness, though, is an option for believers: at the 397p the stock dipped to last month, BAE was trading on only eight times next year’s projected earnings and was yielding 6 per cent on this year’s expected dividend. Last night the shares were back at 475½p.
Advice Hold
Why One for long term though short-term weakness may present buying opportunities
