Smith & Nephew back in the fray

THE INVESTMENT COLUMN

Smith & Nephew has repaid shareholders with a 15 per cent outperformance against the rest of the stock market over the past 12 months. Close to half that gain has taken place this year, when the medical dressings to surgical implants maker has also beaten the healthcare sector as a whole.

The share price has been all the more impressive given that in March Smith announced a £5.5m loss for 1994. Despite calls for the group to use its strong balance sheet to make a substantial acquisition, it is rightly wary after the disastrous purchase of Ioptex,which led to the £150m disposal loss that plunged it into the red. Yesterday, Smith announced a less-spectacular deal, but one more likely to make money.

Acufex is being acquired from American Home Products for £90m. The business is a world leader in the manufacture of hand-held surgical cutters, grasping devices and other equipment used in the fast-expanding area of keyhole surgery.

Based in Mansfield, Massachusetts, it neatly complements the nearby Dyonics subsidiary. Product overlap is said to be as little as 5 per cent and the deal should consolidate Smith's dominance in orthopaedic keyhole surgery, raising its world market share by 5 percentage points to 35 per cent.

The impact on the bottom line is likely to be less immediately impressive, adding operating profits of £4.5m and raising earnings growth by perhaps 1 percentage point two years out. But even with February's £29m acquisition of Homecraft and a number of recent smaller deals, gearing should not exceed 20 per cent by the year-end.

Despite that, the shares, up 0.5p to 175p yesterday, are up with events, standing on a prospective price/earnings ratio of over 15 assuming profits of £186m this year.

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