Monday, June 27, 2011

SN.L - Smith & Nephew - company profile

Overview of activities
SN. (Smith & Nephew) trades in the medical equipment sector. It operates in three areas:
  • orthopaedics - hip, knee and shoulder joint replacements, as well as ancilliary products like nails for hip fractures (ouch!) and bone cement. The company also offers clinical therapies like an ultrasound bone healing system.
  • endoscopy - SN. makes devices for minium intervention (think keyhole surgery), concentrating on sports medicine, particularly the knee, shoulder and hip joints. Devices include digital camera, scopes, light sources, monitors and blades.
  • advanced wound management - a range of products from initial wound bed preparation through to full wound closure. These products are targeted at chronic wounds (i.e. wounds that take a long time to heal, over three months, years, or if at all) associated with geriatrics, such as pressure sores and leg ulcers; although it does have products applicable to all ages, like wounds caused from burns or invasive surgery. Such products includes dressings, gels, draining tubes, vacuum-assisted pressure devices to promote healing.

Market and competition

  • Orthopaedics. Orthopaedics isn't just for geriatrics; it encompasses younger people with sports injuries and accidents. SN. sees emerging markets, particularly China, as an important area for growth. SN. holds about 11% of global market share. Orthopaedics is not immune to wider economic woes, as weak conditions tend to promote deferrals in surgery and heightened pricing pressures. Over the longer term, SN. expects sustainable growth due to ageing populations, increasing obesity and diabetes, technological improvements allowing younger patients to be treated, and increasing demand from emerging markets.
  • Endoscopy. SN intends to grow this business, and capitalise on the increasing acceptance of endoscopy  as a preferred surgical choice. Emerging markets are expected to be a major driver of growth; again, particularly in China. Management estimates that the market has recently been growing between 8% and 12% annually., driven by increasing number of sports injuries, patient desire for less invasive surgical procedures, and their cost-effectiveness.
  • Advanced Wound Management. SN. intends to focus on high growth, high value segments, particularly exudate and infection management. Exudates are fluids that filter from the circulatory system to lesions or areas of inflammation. So, for instance, if you cut your finger, blood flows out and forms a clot around it. That's an exudate. Growth has been about 4% during 2010, and SN. has about 18% of the market. Growth is driven by an ageing population, technology advances, and improvements in cost-effectiveness.

Orthopaedics and endoscopy tend to exhibit some seasonality, but wound management shows very little.

SN. have customers in over 90 countries worldwide. Competition exists among healthcare providers to gain patients on the basis of quality, service and price. Providers are under pressure to reduce the total cost of healthcare delivery.


At a share price of 636p, SN. has a PE of 13.8, EV/EBITDA of 7.4, market cap of £5.7bn, and a yield of 1.6%, covered 4.6 times.

SN. spends about 4% of revenues on R&D. It spent $151m in 2010, $155m in 2009, and $152m in 2008. In 2010, SN employed 10,172 people.

SN. has grown its EPS at about 13% pa over the last decade; an impressive figure. Analyst forecast EPS growth of 4% in 2011, and a further 10% in 2012. EPS has shown a record of increasing earnings for all years except 2006, when there was a dip of 10% as measured in Sterling terms. The company usually reports in USD, and on this basis, has had an unbroken record of increasing earnings during that period.

The balance sheet is in excellent health. It has net debt of £303m, positive net current assets, and non-current liabilities of £650m. Against net profits for the year of £380m, those non-current liabilites could be repaid in 1.7 years; a very comfortable ratio, especially given the consistency in earnings. It has a z-score of 5.4, a very high rating, and a gearing of 18% (39% on a tangible basis).

During the last 5 accounting periods, the company reported total operating profits of £2023m, and total depreciation charges of £774m; giving a combined total of £2797m. Its operating cash flows for the period totalled £2499m, about 90% of this figure. So, earnings quality could be better, but I do not see any undue cause for concern.

Median ROE for the last decade was 27%, achieved with little  debt. ROCE figures have been high, too. This suggests that the company enjoys superior economics.


SN. operates in a competitive but lucrative environment. It enjoys high returns on capital, retains much of its earnings, and has a solid balance sheet from which it can innovate further and grow earnings. Earnings grow consistently. In short, it is a high quality company with good long-term growth potential. In terms of valuation, a PE of less than 14 is acceptable for this type of company. Valued in terms of EV/EBITDA, it is much cheaper than the market (which is around 10), thanks due to the strength of the balance sheet. SN. therefore passes in terms of Quality, Growth and Value. Although analyst forecasts look unexciting in the near term, the company looks solid from a long-term perspective. As of the day of writing, SN. announced the acquisition of Tenet Medical Engineering; demonstraing that SN. can grow both organically and by acquisition.

Tuesday, June 21, 2011

DNO.L - Domino Printing Sciences - great interims

Despite the word "Sciences" in its name, DNO.L (Domino Printing Sciences) is not some concept stock, but a real company making real products; and very successfully I might add.

DNO manufactures industrial printing equipment, controllers and consumables (e.g. ink) for the printing of variable information. This means that it can do things like print expiry dates on packaging, print customer labels for packaging, and even print onto eggs - although not with the same printer, of course. You can see a video of a printer in action here. Check out the "suggestions" panel on the side to see videos of other printers it makes.

Here's a quick run-down of the intermins against the comparable previous half year: revenues up 7%, profits before tax up 13%, EPS up 12%, interim dividend up 20%. The interims are uniformly positive, and the chairman comments:
I am pleased to report an increase in sales of 8 per cent against a strong prior year comparative.  Volumes of our newer technology products, Thermal Transfer and Thermal Inkjet, were both significantly ahead of last year and sales of our new Continuous Inkjet and Laser printers have made good progress since their full launch at the end of the first quarter.  Demand for our fluids, consumables and other after market products remains strong.
 According to my calculations, EPS growth has averaged out at 15% pa over the last decade, and it has never a down year during that period. In fact, in its last finals report for October 2010, the company noted that it had 32 consecutive years of revenue growth.

DNO has a bulletproof balance sheet. At the finals stage, it had net profits of £37m, against non-current liabilities of £13m, with positive net current assets. Net cash amounted to £49m. It has a z-score of 7.6, and negligible interest payments. Return on equity has been about 18/19% during the last 5 years, achieved with very little in the way of debt.

At a share price of 664p, DNO has a PE of 18, and a yield of 2.5%. It has an EV/EBITDA of 11 - only slightly higher than the market average of around 10 (according to my calculations anyway - which should always be treated with suspicion). I believe that a buy is justified at this level, although investors may prefer to buy on the dips.

I have been a a holder of shares in this company since the beginning of the year, and I may well top up. My investment in DNO since the start of the year marks a gradual shifting in my thinking away from bargain-basement shares and more towards quality first, price second. I am becoming increasingly disillusioned with deeper value strategies, as I have noted from my own performance, and that of other bloggers I follow, that results seem to be distinctly mixed. Statistically you come out ahead, but oftentimes it's difficult to distinguish between the market over-reactions and rational markdowns.

Saturday, June 18, 2011

Good calls from Private Investors

In a previous post, on 18 January, I noted down the top ten buys and sells by private investors, as reported by TD Waterhouse. A cynic might say think that the activities of a private investors like me would be good contrary indicators. In fact, there seems to be collective wisdom.

Here's what I did: I looked at the top ten buys, and top ten sells, and ignored any shares that were on both lists. I then calculated the average return of the remaining shares. Three shares appeared on each list. Here's what I found:

Buy list:
ARM           +12%
Aviva          +3%
Amur Minerals -12%
Average        +1%

Sell list:
Gulf Keystone -17%
Bowleven      -19%
Max Petroleum -26%
Average       -24%

During that time, the FT-ALLSHARE index went from 3120 to 2985, a return of -4%.

In other words, shares that investors thought were buys went on to outperform the market by 5%, whilst the shares that investors thought were sells went on to underperform the market by a massive 20%. Interesting, no? I am tempted to repeat the experiment at the end of the month.

Tuesday, June 7, 2011

Laziest. Spammer. Ever

You should really read your junk email box sometimes. You'll often some real gems. Here's one I recived today:

From: Mrs helen cole
Subject: I am sick
I am sick.please contact my lawyer E-Mail (

I mean, come on, put some effort into it.  I'm too lazy to point out the obvious flaws in the email, like a sender having an info account, and a lawyer operating through a Live account rather than a professional address. Not to mention the fact that if you're sick, you should probably contact a doctor, not a lawyer; and you should probably contact them yourselves, rather than blasting out a request to a random stranger.

I jest, of course. The implication is that she's sick, and um, I dunno, she'll give me money if I contact her lawyer, or something. The thing is, she/he never really discloses the logic behind the email. Surely, if you're going to scam someone, you have to incite either greed or sympathy. The email doesn't really work as an idea, though. If I'm greedy, then the email doesn't explain what's in it for me. If I'm a bleeding heart, then there doesn't seem to be a reason that I'd phone her lawyer.

In the end, the scammer seems like a rank n00b, somewhat dim-witted, and very lazy for not spending much time on drafting the email.

I give this scam an F: for epic fail.

I'm half-tempted to respond to the email to see what happens - but I fear that it will lead to more trouble for me than it's worth.