Steady-Eddie Nephew

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The Independent Online
Stripping out the £150m write-off of Smith & Nephew's last disastrous acquisitions the company seems to have regained its "steady-Eddie" image, with dull but reassuringly predictable growth.

Before exceptional items, sales and profits pushed ahead 7 per cent last year - which in a market growing at only 1 or 2 per cent represents a solid improvement in market share. Selling tampons, bandages and orthopaedic implants is a steadier business than drug research and development but it shares that industry's healthy margins.

Before putting aside £27m to rationalise the European distribution network, Smith improved the operating return on sales from 17.9 per cent to 18.2 per cent. That pushed underlying profits up from £161.3m to £172.9m from sales of £964.6m (£948.7m).

Including the exceptional loss on the sale of Loptex, the manufacturer of eye implants which Smith bought at the top of the market and has rued ever since, there was a loss per share of 5p compared with last year's 10.6p. Strong cash-flow, which wiped gearing out completely, allowed payment of an increased dividend of 5.28p.

Sales of the main health-care product areas - specialist dressings, modern plaster casts, keyhole surgery equipment and artificial hips and knees - grew by 10 per cent, benefiting from new products and geographic spread which sees Smith operating in top health-care markets.

Consumer products, including Elastoplast plasters and surgical gloves, slowed in the second half but still recorded 7 per cent growth overall.

The flip-side of Smith's impressive return is that growth is dependent on higher sales rather than widening margins. It also puts pressure on the company to acquire more wisely.

With the company prepared to drive gearing up to 100 per cent in the short term, deals worth up to £400m are possible. The focus is likely to be on expanding the portfolio of medical disposables.

In the meantime, sales growth of between 7 and 10 per cent, steady margins and strong cash flow mean that profits will continue to grow at 9 or 10 per cent a year, pretty much in line with the average of the rest of the FT-SE 100 constituents.

Worries include the ability of the same management that freely admits it messed up over Loptex to get it right this time round. The steady growth trend could also look vulnerable if one of Smith's competitors in the US or Europe took fright and discounted its selling prices too heavily. The shares are supported by an above-average yield of 4.7 per cent next year.