Swiss investment bank UBS downgraded Smith & Nephew Plc (LON:SN) to “neutral” and cut its price target on the British company from 1,250p to 1,100p, amid a poor outlook for the profit margin this year.
The investment bank said in a note that it has previously rated the company at “buy” on the opportunity for margin expansion on strong growth in the Wound business. However, the broker reviewed its stance following Smith & Nephew’s Q4 report last week, which cautioned that the 2016 margin, originally expected to reach 24 percent, will be reduced by a 120 basis points impact from adverse currency exchange rates.
"Given slower than expected growth in that division in H2 2015 and 2016 guidance which implies little or no underlying margin expansion beyond known effects, we do not have sufficient confidence in the opportunity to maintain a 'buy' rating,” UBS said in a note.
The bank flagged several other risks for the UK medical equipment manufacturer, including the dwindling likelihood of a continued decline in the tax rate, a key EPS growth factor in recent years, and potential price pressure on hip & knee replacements starting April.
However, UBS also pointed out that Q1 2016 has three more trading days than Q1 2015, which could buoy growth rates by five percent.
"Whilst brokers have factored this impact into their quarterly phasing in the past we believe this could provide a tailwind to investor sentiment in the near term” UBS said.
Smith & Nephew’s share price had slipped 1.39 percent to 1,066.00p as of 14:10 GMT today, slightly outperforming the FTSE 100 which had dropped nearly two percent. In the year-to-date, the stock is down 11 percent, in line with the FTSE.