Broker snap: Upwards margin surprise at S and N, says Jefferies

3rd May 2012 10:30

Jefferies has reiterated its buy recommendation and 740p target price for medical devices group Smith and Nephew after a 'solid' first-quarter update this morning.Sales rose 3% on an underlying basis to $1,079m, bang in line with consensus estimates.Adjusted earnings per share (EPSA) came in at 19.5 cents, compared with consensus estimates of 18.5 cents, while trading profit of $252m was ahead of the $242m forecast. The trading profit margin of 23.3% also beat the 22.4% estimate."The company states that some of the measures taken to improve efficiency are having positive effects, but also that the phasing of costs positively impacted 1Q, but will reverse in 2Q. Phasing of costs has become a recurring theme explaining surprising margin developments, as phasing of costs was also blamed for the weak 3Q margin in orthopaedics in 2011," Jefferies said.The US broker said that this outlook on second-quarter margins is "strange" given the companies previous comments (alongside full-year results in February) that it "expects the benefits of the restructuring programme to build progressively through the year"."It looks like the benefits have been derived faster and sooner, and that the commentary about a reversal in 2Q could be conservative," Jefferies said.The broker thinks that the first-quarter results are indicative of Smith & Nephew being on target for "a modest increase versus 2011" in profitability.Shares were trading 3.5% higher at 626.5p in morning trade on Thursday.BC