While the FTSE 100 index now trades within 3% of its pre-Covid level following a recovery, some of its members have not experienced such a strong rebound.
Indeed, the share price of real estate investment trust (REIT) Land Securities (LON: LAND) is still down 30% versus its February 2020 level. Meanwhile, medical technology company Smith & Nephew’s (LON: SN) shares trade 35% lower than their pre-pandemic level.
Clearly, both companies have experienced challenging periods as a result of Covid-19. Could they now deliver long-term share price recoveries? Or, is further index underperformance more likely?
Smith & Nephew
Smith & Nephew’s financial performance has been severely disrupted by Covid-19. Lockdown measures and additional demands placed on hospitals from Covid-19 cases mean that a relatively low number of elective surgeries have taken place in the past 18 months. This caused a 12.1% decline in the firm’s underlying revenue in the 2020 financial year.
However, the company’s recent performance has shown a significant improvement. For example, in the first half of the 2021 financial year, Smith & Nephew delivered a 21% rise in underlying revenue. Much of this growth took place in the second quarter, when revenue rose by over 40% on an underlying basis as containment measures abated.
Clearly, there is scope for a return to Covid-19 lockdowns and a rise in cases. This would be likely to negatively impact on the company’s future financial, and share price, performance. However, on a long-term view, Smith & Nephew’s financial prospects could improve significantly as containment measures become less likely.
Indeed, the company is forecast to post an annualised rise in earnings per share of 23% over the financial years 2020-23. This could mean that it offers good value for money – even though it currently trades on a price-earnings ratio of 34.
Lockdowns also caused a severe deterioration in the financial performance of Land Securities. Its office, retail and leisure tenants struggled to pay rent in many cases due to factors such as a challenging economic outlook and lower footfall. As a result, the company’s revenue declined by 39% in the 2021 financial year.
In response, the firm has refreshed its strategy to adapt to evolving consumer trends that have been accelerated by the pandemic. For instance, it is seeking to capitalise on increasing demand for flexible office space through expanding this part of its portfolio. It also plans to dispose of assets where it feels there is a lack of growth opportunities and recycle the capital into faster growing areas.
Clearly, this process is likely to take many months, if not years, to complete. In the meantime, factors such as an increasing prevalence of home working and rising online retail sales, as well as the potential for new lockdown measures, could cause further challenges for Land Securities.
However, with the company’s shares trading on a price-to-book ratio of 0.7, they appear to factor in future threats. Although short-term volatility may remain relatively high, the stock could offer long-term recovery potential.