Earlier this week, Bank of America put in a Buy rating on the FTSE 100 medical firm Smith & Nephew (LSE: SN.). The vote of confidence was further established by an Outperform rating put in the following day by fellow broker Bernstein.
So what’s prompted this renewed faith in the medical technology company — and should I consider buying the shares now?
Troubled times
I’ve considered Smith & Nephew shares several times over the past year. However, lingering issues at the company have stopped me just short of buying. The shares are down 40% over the past five years, hitting a low of £8.96 last October.
It’s a disappointing outlook for a stock that gained almost 300% in the decade prior to 2020.
During these troubled times, the firm’s gone through no less than three CEOs, due in part to salary disagreements. Most recently, the board narrowly approved a 30% pay rise for CEO Deepak Nath — but not without a significant pushback from shareholders.
In 2019, chief executive Namal Nawana reportedly stood down because his requests for higher pay couldn’t be met under UK corporate governance standards.
An active boost
With pandemic-era supply chain issues now all but resolved, I’d imagine things should start improving. Hospital surgeries are back in full operation and the materials needed for prosthetics are available for delivery. Moreover, the company recently received a much-needed boost from activist investor firm Cevian.
Last month, it acquired a 5.11% stake in Smith & Nephew with the aim to help get things back on track. It’s previously helped several other struggling company’s to recover, with its members currently serving on 10 boards globally. Since Cevian made its acquisition less than two months ago, the share price has jumped a huge 20%.
Oh no, am I late to the party? I don’t think so. With much room still to grow, I’m wondering if the price could regain the all-time high of nearly £20 it achieved in 2019.
What do the financials say?
Smith & Nephew’s valuation looks fairly attractive. The shares are estimated to be undervalued by 33% using a discounted cash flow model. It also has a forward price-to-earnings (P/E) ratio of 22.8, well below the industry average of 30. That’s a big improvement on its trailing P/E of 44, as earnings are expected to grow 80% in the coming 12 months.
In its first-half 2024 results, earnings per share (EPS) increased 20% to 24p, with revenue and income up 3.4% and 24% respectively. Unfortunately, with only a 2.4% yield, the company doesn’t offer much in the way of dividends. However, payments were growing prior to 2019 so that might continue if things go well.
Its joint US business continues to lose some ground to competitors but, elsewhere, the Hip and Knee Implants division is up, along with Sports Medicine and ENT.
While progress has been good, the threat of supply chain disruptions remains a significant risk. Ensuring operations continue uninterrupted while growing the US business will likely be a key concern for the company going forward.
However, I’m very enthusiastic about the direction it’s headed and have firmly put the shares on my to-buy list for next month.
