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Stock Watch: Smith & Nephew and BAE Systems

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.

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Namal Nawana may have only been chief executive of Smith & Nephew (SN.) for a mere 18 months, but in that time the share price rose 40%. The day his departure was announced, the shares in the medical technology company fell more than 8% and they have yet to fully recover.

The latest news that Smith & Nephew had acquired US-based ear tube group Tusker Medical, for an undisclosed sum, saw the shares pick up 1.5% but new chief executive, Roland Diggelmann a former executive at Roche Diagnostics, and a non-executive director at Smith & Nephew since last year, has big shoes to fill.

Mr Nawana, who joined Smith & Nephew in May 2018 significantly increased revenue growth and overhauled the group’s operating model. However, it all turned sour when he asked for more money. The company which tried as it might to satisfy his demands, including considering switching the group’s listing to the US, partly to escape the UK’s stricter attitude towards executive pay, could not keep him.

The question is whether Mr Nawana has done enough to keep momentum going, even in his absence. At the last set of results in October the company raised its revenue guidance for a second successive quarter, on the back of strong growth in its sports medicine and orthopaedics businesses.

For the full financial year, which is due to be reported on Thursday, underlying revenue growth is expected to be in the range 3.5% to 4.5%, while trading profit margin is expected to be around 22.8%.

The global medical technology business announced that reported growth was 6.5%, with the company's orthopaedics business delivering 3.4% revenue growth, while its sports medicine arm accelerated from strong first half, delivering 6.9% revenue growth.

Smith & Nephew also reported continued mid-teens growth from emerging markets operations, led by another quarter of strong growth in China. Whether the outbreak of the coronavirus has a negative impact on that though, now remains to be seen.

The knock-on effect of the coronavirus outbreak is already starting to come through elsewhere. In its latest set of results RELX (REL), the FTSE 100-listed information, analytics and scientific publishing company, said it has rescheduled a fifth of its upcoming exhibitions in China, saying the outbreak's impact on its business is still "uncertain".

Nine have been rescheduled, whether more shows are affected will depend on how the virus evolves. The big question, still to be answered, is what the impact is on revenues.

Berenberg recently repeated its buy rating on Smith & Nephew and raised its price target to 23.25p, from 21.85p. Jefferies International has also reiterated its buy rating but cut its price target to 2160p from 2200p and Goldman Sachs has retained its neutral investment rating and cut its price target to 1670p from 1695p Another company announcement to keep an eye on is full-year results from BAE Systems (BA.), also on Thursday. It appears that the UK defence group could be heading in a new direction after paying out a hefty $1.9 billion for the GPS business of Collins Aerospace.

The group is acquiring a business specialising in GPS receivers for the US military, its main market and looks like a good addition to Electronic Systems, BAE’s biggest division.

It could also spell a revival of the company’s fortunes after the ill-thought through purchase of anti-hacking group Detica for $1 billion in 2008. BAE has been languishing for years, so a new direction could be in the offing.

A flurry of brokers’ notes suggests the January acquisition has sparked renewed interest in the group among analysts.

Deutsche Bank has recently reiterated its buy rating on BAE Systems Plc and raised its price target from 685p to 730p. Societe Generale retains its hold rating on BAE but has raised its price target from 593p to 705p. Barclays Capital has upgraded to overweight, from equal weight, and raised its price target from 550p to 760p and JP Morgan Cazenove has repeated its overweight rating and raised its price target to 730p, from 715p.

Five year performance

(%) As at 13 Feb 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Smith & Nephew -6.8 13.8 7.0 19.2 27.0
BAE Systems -6.8 37.3 -4.3 -5.6 33.6

Past performance is not a reliable indicator of future returns

Source: Refinitiv, as at 13.2.20, total returns in local currency

Important information: When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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