Deutsche Bank has downgraded Smith & Nephew (NYSE:SNN) from buy to hold and is cutting its target price on the British orthopedic giant over concerns about the company’s 2012 outlook.
The Frankfurt, Germany-based financial institution cut its target price from 680p ($10.50 USD) to 646p ($9.98 USD) and predicted that SNN would lose the advantage from its flagship orthopedics division in 2012, as competitors continued to gain strength.
However, the bank also called for an increased market presence in the company’s endoscopy and wound care business.
"We still believe management can re-position S&N in 2012-16 to create more value and to deliver more growth in the mid-to long term," said a Deutsche Bank analyst, according to StreetInsider.com.
Shares of SNN were off by about 1.4% to $46.22 in mid-day trading on The Street.
Last quarter, Smith & Nephew reported strong saled of $1.03 billion during the three month period ended October 1, a nearly 10% jump from the previous year. Despite the jump in sales, net income sagged to $133 million, or 14.9 cents per share, compared to $137 million, or 15.4 cents per share for the same period last year.
The narrowing profits came as a result of slimmer margins for the workhorse ortho division. The unit reported 15.6 percent margins, compared to 22.2 percent for Q3 2010. Smith & Nephew chalked the decline up to three factors:
"First, we continued to experience pressure on the gross margin from the sales mix, a trend seen in the first half of the year. Top line growth was driven by products and geographies where we achieved lower margins, reducing the gross profit margin by about 200 basis points," according to a press release. "Second, orthopaedics experienced an unusually high level of periodic costs – legal, inventory and receivables – in the quarter, totaling about $10 million.
"Finally, it is clear that the modest growth and continuing pricing pressures in established markets necessitate a lower orthopaedics cost base. Actions were underway to address this, but these have not been adequate, resulting in a cost base which was $10 million too high in the quarter. The new combined orthopaedics and endoscopy management team has instigated much tighter controls over spending and we are confident that the orthopaedics margin will improve materially from Q4 onwards."