The supermodel of the show? Smith and Nephew , the med equipment firm that got smacked around a bit in the first quarter, sinking from $64.73 at the end of April to close at $57.40 at the start of May -- an 11% drop! It's been drifting in the $50s since and closed at about $52 today, a price far below its worth, according to Jim -- but a great look for you.
Smith and Nephew is involved in several related businesses, a large share of its sales resulting from orthopedic reconstruction (hip and knee implants) -- a definite growth market, considering the increasing age and expanding waistlines of our population. Smith and Nephew also has an orthopedic trauma unit that makes equipment for doctors -- who traditionally stick with familiar suppliers -- to help mend bone fractures and other trauma. Then there's an endoscopy unit that makes tools to look around your insides --as seen on "ER." Finally, Smith and Nephew has a business in Wound VAC equipment -- advanced technology that quickens healing of injuries with less risk of infection. It also happens to be a massive $1.6B market, in which the only competitor is Kinetic Concepts -- now there's a happy duopoly!
Yes, Smith and Nephew did miss the quarter, but there's a tale behind that. Last year, Smith and Nephew bought two companies: Swiss orthopedics firm PLUS and BlueSky (which gave access to the Wound VACs business). Unfortunately, PLUS had some minuses -- skeletons in its closet that ended up costing $100M in sales costs and $10M in investigational costs, all due to -- ahem -- "unacceptable selling practices." (Their language, by the way!)
Even with $3.37B rev in 2007, Smith and Nephew got battered. Adding to the PLUS scandal, the street's expectations for Smith and Nephew's other acquisition, BlueSky, were more in line with its celestial-sounding name than in reality. At the time of purchase, BlueSky was basically 20 employees and $11M in sales. Smith and Nephew spent needed funds to grow BlueSky's sales and manufacturing capabilities -- spending that hurt its other businesses. It was an obvious cost trade-off at the time, but the street still didn't like it.
So it's taken a beating, but Smith and Nephew did what was necessary to expand key businesses, so the second half of the year -- i.e., NOW -- should start showing it reaping the benefits.
Jim's advice: forget the first half of the year at Smith and Nephew -- the bad news is in the past. SNN is now a cheap play on the aging of the American population -- and that's a guaranteed trend.
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