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Falling profit margins wound Smith & Nephew

4th November 2011 Print

As Smith & Nephew reports disappointing Q3 figures, Nick Raynor, investment research analyst at The Share Centre, explains what they mean for investors.

"Smith & Nephew reported sales figures that were largely in line with expectations, with revenue increasing by 10%, and underlying growth rising by 5%. However, poor margins in its orthopaedics side of the business put pressure on the company's performance. The 15.6% margin, which was short of analyst expectations, was caused by high periodic costs, adverse sales mix and the need to reduce costs to reflect market conditions.  

"The company has been attempting to improve margins by cost cutting for some time. However, these figures have shown the cost base is still too high. Although Smith & Nephew have restructuring plans in place, we doubt these will be implemented by the end of the year, which could see crippling margins impede final year results.  

"Concerns remain over the US health system and with no signs of the credit crunch easing, we could see Smith & Nephew's profitability fall further. The company generates a large proportion of its business from elective procedures, however, as worry over employment remains, people are opting to wait for the national healthcare system.

"The market reacted to these disappointing figures with the share price falling by as much as 6% in early morning trading. Following these results our current ‘hold' recommendation looks weak and Smith & Nephew is now under review."