Smith & Nephew soars as investors await activist masterplan

“Shares in orthopaedic implant and wound care specialist Smith & Nephew are surging amid (as yet unconfirmed) reports that American activist investor Elliott Management has taken a stake in the FTSE 100 firm,” says AJ Bell Investment Director Russ Mould.

“Elliott’s formidable reputation clearly precedes it, following high-profile campaigns where the investor has called for change at BHP Billiton, Akzo Nobel, Samsung Electronics and American firm Arconic, in the belief that shareholder returns can be improved. Under the leadership of Paul Singer, Elliott has a combative reputation, not least because of its moves to seize an Argentine ship in Ghana as it fought with Buenos Aires’ Government over the terms of repayment to holders of the country’s debt.”

“With Elliott so far declining to confirm whether it has a stake or not, it is hard to divine their intentions. However, Smith & Nephew’s prior public difficulties regarding the lofty salary of chief executive Olivier Bohuon, relatively modest earnings progression this decade and margins which lag those of the peer group all mean it is a potential target for an activist.  Especially as its shares trade at a valuation discount to those of its major rivals – even if Bohuon has already taken a pay cut and announced he will step down at the end of 2018.”

  Domicile 5-year compound annual growth rate (CAGR) in sales (%)   Operating Margin (%)   Price/Earnings (PE) ration (x) Dividend Yield (%)
Abbott Labs USA -0.50% 12.80% 86.6 x 1.90%
Boston Scientific USA 1.90% -4.10% 52.0 x 0.00%
ConvaTec UK n/a 13.30% 20.1 x 1.70%
Edwards Lifesciences USA 12.00% 26.10% 33.3 x 0.00%
GN Store Nord Denmark 9.20% 16.30% 27.6 x 0.50%
Intuitive Surgical USA 9.00% 35.00% 51.0 x 0.00%
Medtronic USA 12.90% 18.50% 26.0 x 2.30%
Sonova Switzerland 8.10% 22.30% 32.9 x 1.30%
Stryker USA 6.40% 18.70% 32.3 x 1.20%
Varian USA 4.40% 20.10% 27.4 x 0.00%
William Demant Denmark 8.30% 18.80% 28.5 x 0.00%
Zimmer Biomet USA 11.50% 22.20% 33.7 x 0.80%
AVERAGE   7.60% 18.30% 37.6 x 0.80%
AVG. Excl. Abbott   8.10% 20.40% 36.3 x 0.80%
Smith & Nephew UK 1.80% 17.20% 19.3 x 1.60%

Source: Morningstar

What are activist investors?

Activist investors may be disgruntled holders of a stock but it is more likely the hedge fund in question believes a company is underperforming or being mismanaged and therefore ripe for a shake-up. In these cases, the activist will quietly build a stake at what they consider a depressed valuation and if that fails they will loudly engage with boardrooms in a public attempt to force change and unlock what value they believe is hidden by poor operational and managerial performance.

Activists will often go further and seek representation on the board or even take a hands-on approach to running a company. Calls for changes of management are a staple tactic, while activists will often demand a new strategy, asset sales, shift in dividend policy or even the break-up or sale of a company.

In the end, activists want the same as any shareholder – to find an undervalued asset which then delivers improved total returns from capital gains or higher dividends or a combination of the two. When they get involved they are not afraid of working hard to create the necessary catalyst for share price performance themselves. When they get involved, activists tend to focus on one of four things (or a combination of them):

Strategic options: spin or sell

  • Asset disposals or spin-offs to recognise value
  • Break-up
  • Put the company in play for a bid

Financial options: more effective capital allocation

  • Share buybacks
  • Special dividends
  • Dividend initiation or increases

Operational angles: improve performance

  • Change the management
  • Sale and leaseback of assets
  • Close or restructure poorly performing units

Governance: improve reputation and lower risk

  • Rein in excessive executive remuneration
  • Ensure board has right balance, executive and non-executive
  • Better align management and shareholder interests

These articles are for information purposes only and are not a personal recommendation or advice.