Smith & Nephew Faces Price Pressure; Giving a Slight Haircut to Our Fair Value Estimate

Smith & Nephew posted second-quarter results that displayed sequential softness following relatively strong performance in first quarter, and we’re modestly lowering our fair value estimate to $38 per ADR (GBX 1,567 per share) after trimming our margin expectations for 2022 and 2023. Nonetheless, we think the market reaction to management’s lower outlook is exaggerated. The firm remains on track to meet our estimates for flat top-line growth in 2022, and our primary adjustments involved tweaking expenses for the next 24 months. Though we remain confident in the firm’s narrow moat, management’s comments about the challenges in its orthopedics business underscores the negative moat trend we’ve given Smith & Nephew.