Thursday preview: Smith and Nephew, Diageo, BG Group

The heads of day-traders could be in danger of exploding on Thursday morning as a welter of big names are set to update the market.

The heads of day-traders could be in danger of exploding on Thursday morning as a welter of big names are set to update the market.

First quarter results from medical devices maker Smith & Nephew are expected to be weak, largely because the company has said they would be.

"We do not expect any signs of elective procedure volumes improving, but we expect wound and endoscopy will continue to drive growth, leading to 4% organic group growth in the quarter," predicts Credit Suisse.

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The Swiss bank predicts group sales of $1,804m and a trading profit of $235m.

"The first quarter of the year is generally a weak quarter, however in orthopaedics the comps [comparatives] are easier than they were in Q4 [the fourth quarter] and we expect a sequential improvement to 1% organic growth. Wound and Endo [endoscopy] remain the growth engines with estimated 8% and 7.5% organic growth, respectively," Credit Suisse said.

The Swiss outfit is predicting that the earnings before interest, tax and amortisation (EBITA) margin will slide to 21.7% from 21.81% a year earlier, primarily due to the lower profitability in the orthopaedic division, which, Credit Suisse acknowledges, is being addressed. "The weaker margin is the main reason for our estimated 2% decline yoy [year-on-year] in EPS [earnings per share] to $18.05 cents," Credit Suisse said.

Nomura Securities is concerned that Smith & Nephew (S&N) might have lost more market share in the European Union and the US while at the same time worrying that management is over-estimating the opportunity that emerging markets present.

"S&N have struggled in Hips over recent quarters and have been unable to record positive growth in constant currency terms since Q1 2010. However, we expect S&N to continue its solid growth pattern in knees. Biomet saw mid-single digit growth in both hips (6%) and knees (4%), helped by acquisition and product launches. Depuy (J&J) reported +1% and +2%, respectively, and both companies reported that the knee market (~50% of total re-constructive market) looked healthier in 2012," Nomura notes.

"Overall, we believe increased competition between J&J, Zimmer, Stryker & Biomet could lead to market share losses for S&N, particularly in developed markets. We see a trend of larger players like J&J and Stryker winning more hospital tenders by being able to bundle their wider product portfolios (rational for J&J/Synthes deal)," the Japanese broker added.

Nomura has also been casting its eye over Diageo, owner of some of the best known spirits brands in the world, not forgetting the iconic Guinness stout brand.

The broker reckons Diageo's fiscal third quarter revenue will be up 5% year-on-year, in line with the second quarter but not a patch on the 9% growth seen in the first quarter, although that strong performance was boosted by technical factors.

Nomura expects the company will reiterate medium-term guidance of 6% revenue growth and two percentage points of margin improvement over a three-year period.

"The recent company webcast on Europe indicated some softness in recovery in some markets; with the reversal of some technical effects, we expect revenue momentum to be negative in Q3 (-2%). We also expect more normal growth in LatAm [Latin America] (+16%) and Africa (+7%) after a stronger H1 [first half]," Nomura predicted.

As for North America, Nomura thinks performance will be robust but would be surprised were there to be an acceleration in the rate of recovery on the 2011 run-rate, where the industry saw revenues rise 4%.

Perennially in the shade of BP and Shell but doing all right despite that, BG Group is tipped by Charles Stanley to report first quarter net income of $1.3bn, up from $1.04bn the year before.

"There was a recent setback on the back of the Elgin gas leak in the North Sea. The Elgin field is operated by TOTAL of France but BG Group has a 14% stake and the shut-in will have a small impact BG's volumes for the remainder of the year. When the disruption was first announced it knocked some 50p off the BG share price. Apart from such incidents which again show some of the industry risks, the Q1 results should look good driven by high oil prices and with another strong quarter from LNG [liquefied natural gas]," said the broker's oil and gas analyst, Tony Shepard.

"The LNG operations contributed a record profit of $830m in Q4/11 and 2012 guidance was increased to a mid-point of $2.7bn compared to a $2.57bn profit achieved in 2011. If LNG's Q1 profit can match the strong Q4 performance it could imply guidance is too conservative," Shepard suggests.

On the economic front, it is the turn of the service sector to get the PMI (Purchasing Managers' Index) treatment on Thursday, with market consensus predicting April's level will be 54.3, down from 55.3 in March but still well above the 50 level which marks the cross-over point between contraction and expansion.


Bloomberg Consumer Confidence (US) (14:45)

Continuing Claims (US) (13:30)

ECB Interest Rate (EU) (12:45)

Initial Jobless Claims (US) (13:30)

ISM Non-Manufacturing (US) (15:00)

ISM Services (US) (15:00)

Productivity (US) (13:30)


Johnson Service Group


Diageo, Legal & General Group, Mondi, Morgan Sindall Group, Morrison (Wm) Supermarkets, Rexam, RSA Insurance Group, Schroders, Schroders (Non-Voting), St James's Place, WSP Group


Aga Rangemaster Group, ARM Holdings, Aviva, Avocet Mining, GKN, GlaxoSmithKline, Inmarsat, Japan Residential Investment Co Ltd., Lancashire Holdings, Millennium & Copthorne Hotels, Mondi, Morgan Sindall Group, Petroleum Geo Services ASA, Phoenix Group Holdings (DI), Premier Foods, Rapid Realisations Fund Ltd., Reckitt Benckiser Group, Rexam, Schroders, Schroders (Non-Voting), Timeweave, Trap Oil Group, WSP Group


Carphone Warehouse Group


PMI Services (09:30)


British American Tobacco, Herald Inv Trust, Spirent Communications, Stadium Group


Avocet Mining, Banco Espirito Santo SA, BG Group, Man SE, Millennium & Copthorne Hotels, Randgold Resources Ltd., Reed Elsevier, Smith & Nephew