If fund managers’ predictions meant anything, Smith & Nephew would no longer be a listed company. For the past three years the medical devices maker has often topped the Bloomberg index of businesses considered most likely to be bought. So far, it remains stubbornly independent.
Rumours have of course surrounded the business, most recently in October of a bid from its US rival Stryker, but nothing has materialised. In the absence of an offer, and at around the time that a Stryker takeover was being talked about, the activist hedge fund Elliott Management entered the scene.
Elliott is well known as a scourge of executive teams and is reported to have attempted to persuade Smith & Nephew to make strategic changes aimed at increasing its attractiveness to a potential buyer. S&N has never even commented on Elliott’s stake.
That said, yesterday’s results appeared to include a nod towards complaints of underperformance with the announcement of the company’s Apex, or accelerating performance and execution programme, that intends to produce annual cost savings of $160 million by 2022, with a one-off gain of $240 million.
With its progressive dividend policy that sends about a quarter of earnings back into the wallets of shareholders, any savings should be good for the shares’ yield, which has been relatively muted of late.
But what of the future? Here there are promising signs. For a start, Brexit is not expected to have a material impact on the business apart from concerns about potential regulatory barriers with the European Union after withdrawal, but from a group point of view any slowdown in the UK is not a major concern. To this point, even though the NHS is the company’s single largest customer, demand for products such as knee implants is relatively immune to the wider economic outlook and a relatively stable money earner.
In the US, the Trump tax cuts will provide a one-off gain of more than $30 million and provide a longer-term boost for the source of about half of S&N’s revenues.
Further afield in emerging markets, the latest results show double-digit growth and while this was not enough to prevent earnings from coming in at the lower end of the company’s guidance the outlook is hopeful, particularly in China, the largest driver of this expansion.
Operationally, research and development, including a new centre in Hull, can be expected to provide a longer-term boost to the business. In particular, digital businesses such a wound care service designed to help nurses provide better early-stage treatment are a sign of the new products that will be coming on line in future.
Similarly, last month marked the first operation using its robotic knee surgery system, while an investment in the Leaf patient monitoring system that will tell clinical teams when a patient needs to be moved to prevent pressure ulcers is another development that points towards continued innovation at the company.
That all said, investors will be monitoring merger rumours and with the retirement of the chief executive, Olivier Bohuon, this year there is the potential for a change in attitude towards a potential acquirer, particularly with Elliott now on the scene and presumably looking at a way to make sure it exits its investment with a healthy return.
At the current price the valuation certainly does not look demanding and a quick scan across the City’s estimates suggest some decent upside, which means that now might not be a bad time to get in on the act, especially if late-cycle corporate behaviour takes hold of markets.
Advice Buy
Why Company looks to be primed for growth
Beazley
Investors in Beazley, the Lloyd’s of London insurer, have kept their faith in the company. Despite a near-halving of profit in 2017, its shares jumped more than 5 per cent yesterday, going 29p higher to 560½p after it unveiled its annual results.
That was in large part on relief that Beazley, a significant player in the American property insurance market, had not suffered as badly as feared from the hurricanes, earthquakes and wildfires that devastated parts of the US, the Caribbean and Mexico. Despite paying out more than $110 million in claims after the catastrophes, Beazley remained profitable during the year.
The upward march of its shares also reflects the insurer’s track record of adeptly managing its exposure to its various markets, ranging from marine to political risk, and of developing specialist products that are well ahead of competitors’ offerings. These include cyber-insurance, a market that Beazley entered in the US in 2008 with a policy to cover losses. It also offers a range of services to help the companies that have been hit; they include PR advice and a forensics team to help stop attacks.
There is still plenty of room for the product to grow in America, where the general insurance market is six times larger than in the UK. There are also good prospects for continental Europe, where companies are under increasing pressure to buy cyber-cover, thanks to the EU’s incoming General Data Protection Regulation that will require data breaches to be reported and exposes companies to fines if they do not look after customers’ information properly.
Beazley thinks that because of rate rises in property insurance and reinsurance and reasonable levels in its other lines, 2018 will be the first time in about a decade when all areas of its business will grow.
Beazley’s shares have risen by about 600 per cent since its float in 2002 and now trade at a premium to most other insurers. Buying in now might look as if a bargain price has been missed long ago. However, Beazley has shown itself able to underwrite with discipline, which puts it in the best position possible to avoid large losses from catastrophes, while also being able to innovate.
Advice Buy
Why One of the best track records in insurance sector
