UBS on Thursday issued a note on Smith & Nephew plc (ADR) SNN after the company recently announced 2016 guidance that gave indications of limited margin expansion. The firm downgraded Smith & Nephew from Buy to Neutral and lowered their price target from 1,250p to 1100p
Analyst Ian Douglas-Pennant wrote, "We believe Smith & Nephew has limited scope for margin expansion...much of Smith and Nephew's EPS growth in recent years has come from reductions in the tax rate, which management says is coming to an end."
UBS gave a key takeaway on why they downgraded Smith & Nephew: U.S. reimbursement.
UBS noted that there is uncertainty on the impact of the recent U.S. bundled reimbursement change as surgeons can increase pricing pressure by being paid to find cost savings in medical equipment. This may create increased competition in the medical equipment industry as companies work to differentiate their products and increase market share.
Smith and Nephew will report Q1 results on May 5 and UBS expects strong growth in the quarter due to increase purchasing volumes. However, analysts will be paying close attention to the company's profitability as a result of the weakening global economy and increased competition in the medical equipment industry that can put pressure on margin.
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