A medical marvel

MedicalTopping the FTSE 100 leader board of elite British companies this morning is Smith & Nephew, the global medical technology business. As I write, S&N shares are up nearly 4% at 627p, which values the group at £5.6 billion.
Joints and wounds
Unless you've had a nasty sports injury or joint problem, you may never have used a Smith & Nephew product. Nevertheless, this high-tech medical company has built up market-leading positions in five key clinical areas:
  • Orthopaedic reconstruction
  • Advanced wound management
  • Sports medicine
  • Trauma
  • Clinical therapies
In short, S&N is best known for its knee and hip implants, arthroscopic equipment (for keyhole surgery) and its wound pads. Given the technical and regulatory difficulties of entering these medical markets, S&N has a wide competitive moat around its business, which generates high margins.

In other words, S&N is the kind of well-run business that US super-investor Warren Buffett likes to own. What's more, this medical marvel is also a favourite of Britain's super-investor Neil Woodford.
As we revealed in March, Woodford started buying shares in Smith & Nephew in the second half of 2011. Woodford paid an average price around 564p a share, so he's up over 11% today. Nice work, Neil!

Good growth
This morning, S&N released its first-quarter results for 2012, which it described as "a good first quarter".

In the first three months of this year, revenue climbed to $1.08 billion (£666 million), up 3% on Q1/2011. S&N has two core divisions: in Advanced Wound Management, revenue grew by 5% to $240 million, while its Advanced Surgical Devices arm brought in $839 million, up 3%.

Trading profit rose by 5% to $252 million, with S&N's operating margin rising by 0.5 percentage points to a very healthy 23.3%. As a result, earnings per share rose to $0.18 from $0.175, up nearly 3%.

What's more, S&N's high margins and strong cash flow allowed it to reduce net debt to a mere $28 million, down a whopping 92% from $351 million a year earlier. Thus, S&N will soon have net cash, making it a rare beast among FTSE 100 firms.

A great British business
Commenting on these results, Olivier Bohuon, S&N's chief executive, said:

"Smith & Nephew has had a good first quarter. We grew revenue, increased profit and improved our trading profit margin. We saw the first results of our actions to make Smith & Nephew more fit and effective. 2012 is a critical year for implementing our new strategic priorities. Our plans to progress the structural changes, additional investments and, of course, greater efficiencies, are now underway. Throughout Smith & Nephew, at every level, there is a clear sense of direction, as we work to reshape the Group for future growth."

I rather like the look of Smith & Nephew, despite it not being the typical value or high-yield share that usually catches my eye. That's partly because of its global grasp: S&N has nearly 11,000 employees, a presence in over 90 countries and annual sales approaching $4.3 billion in 2011.

Delving into its fundamentals, at today's price of 627p, Smith & Nephew trades on a forward price-to-earnings ratio of 12.4 and offers a prospective dividend yield of a modest 1.8%, covered 4.3 times over.

While these aren't classic value indicators, S&N is a quality business -- and both its core divisions are growing their revenues, profits and trading margins. Thus, I'm adding Smith & Nephew to my personal watch list as a quality/growth play.

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