Home / INVESTING / Investing / Activist Cevian has a stake in medical device company Smith & Nephew. How it may help improve margins

Activist Cevian has a stake in medical device company Smith & Nephew. How it may help improve margins

A logo unusual outside of a facility occupied by Smith & Nephew in Austin, Texas.

SIPPL Sipa USA | AP

Company: Smith & Nephew (SN.-GB)

Trade: Smith & Nephew is a British portfolio medical technology company that operates worldwide. The company develops, turn outs, markets and sells medical devices and services. Its segments include Orthopedics, Sports Medicine and Ear, Nose and Throat, as well as Helped Wound Management. Its Orthopedics segment includes a range of hip and knee implants to replace damaged or worn joints, robotics-assisted and digital give the go-ahead technologies, as well as trauma products used to stabilize severe fractures and correct hard tissue deformities. Its Pleasures Medicine and ENT businesses offer advanced products and instruments used to repair or remove soft tissue. Its Advanced Occupied with Management portfolio provides a comprehensive set of products to meet broad and complex clinical needs.

Stock Market Value: ~9.6 billion British crushes (11 pounds per share). The stock also trades in the U.S. as an American depositary receipt under the ticker “SNN.”

Activist: Cevian Foremost

Percentage Ownership:  5.11%

Average Cost: 9.68 pounds

Activist Commentary: Cevian Capital, founded in 2002, is an international investment unbending acquiring significant ownership positions in publicly listed European companies, where long-term value can be enhanced on account of active ownership. Cevian Capital is a long-term, hands-on owner of European-listed companies. It is often called a “constructive activist” and is the largest and most seasoned dedicated activist investor in Europe. Cevian’s strategy is to help its companies become better and more competitive all through the long term, and to earn its return through an increase in the real long-term value of the companies. The firm’s work at companies is typically supported by other possessors and stakeholders.

What’s happening

Cevian Behind the scenes

Smith & Nephew is a global leader in medical technology. The party develops and sells medical devices and services across three segments, maintaining a dominant global market whereabouts in each: Orthopedics, Sports Medicine and ENT, and Advanced Wound Management. Smith & Nephew is well known for its product distinction and its brand perception is very strong. In addition, the company operates in fundamentally growing and consolidated markets with great competitive dynamics. In general, there is very predictable customer behavior as well as stable market shares for the trade leaders. In 2023, the company generated $5.55 billion in revenue, of which 40% came from Ortho, 31% from Make a laughing-stock ofs Med and 29% from Wound. However, the profitability profile is quite different. After allocating overhead Ortho only has 11% operating margins, while Sports and Wound have twice that with 22% operating plays.

Despite its leading market position and the favorable industry dynamics, Smith & Nephew has not generated shareholder value for numerous years – down 44% since Jan. 1, 2020 and off by 33% since its Jan. 1, 2021 post-Covid price. This is not surprising, and the motive seems obvious: operating margins in its largest business, Ortho. In 2019, Ortho had operating margins of 23%, which decayed to 13% in 2020. They are now at 11% today. This is due to self-inflicted issues relating to supply chain management, logistics and create out of causing back orders and either the implants or the required tools not being at the right place at the right time. This climax is somewhat unique to Ortho as it is a much more complicated business than Wound and Sport and requires the timely utterance of not only a variety of sizes of implants, components and devices for each procedure, but also the specific tools associated with the routine. Another major contributor to the company’s missteps is that Smith & Nephew has seen a significant amount of management gross revenue over the past five years.

Management has now released a 12-point plan of which a major component is fixing Ortho to regain force and win market share. While this is a step in the right direction and this management team may be able to successfully implement this lay out, it is not going to happen with continued management turnover. It is impossible to implement a long-term operational plan when there is a new CEO every few years. This is a Theatre troupe that clearly needs an activist, but the good news is that Cevian is the perfect activist for a company like this. The two apparatus Smith & Nephew needs more than anything is a long-term mindset and operational improvements. Cevian is a long-term activist – the unflinching’s average holding period is four to five years, but often it will hold positions for eight to 10 years – with an operational deportment focus. The firm has extensive history of helping companies improve operations either as an active shareholder or board fellow. There is no reason why the company should not be able to boost the operating margins of the Ortho division at least back to its pre-pandemic unfluctuating and maybe even higher, closer to peers like Stryker and Zimmer Biomet.

We expect that Cevian resolution look to assist in this endeavor from a board level because they take board seats in most of their activist emplacements. Currently, Cevian’s professionals serve on the boards of 10 portfolio companies in six different countries. Given the firm’s involvement and the fact that it is the company’s second-largest shareholder, we would expect that Cevian would be able to get a board heart here the way it does in most of its engagements – amicably or by invitation.

Ken Squire is the founder and president of 13D Monitor, an institutional research mending on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

Check Also

A Trump meme coin ETF is already in the works

A cartoon likeness of US President-elect Donald Trump with cryptocurrency tokens, depicted in front of …

Leave a Reply

Your email address will not be published. Required fields are marked *