Home Money MIDAS SHARING TIPS: Why it won’t soon be fashionable to turn your back on Smith & Nephew

MIDAS SHARING TIPS: Why it won’t soon be fashionable to turn your back on Smith & Nephew

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Hell of a time: An aging population and a hip and knee replacement company should be a match made in heaven

An aging population and a hip and knee replacement company should be a perfect match. So why have Blacksmith and nephew Did investors (S&N) have it so bad?

Shares are down 38 percent over the past five years and almost 6 percent since the beginning of 2024.

There are countless reasons for this. These range from a well-publicised (but now resolved) revolt over new chief executive Deepak Nath’s huge £9.5m pay package to fears that the popularity of weight-loss drugs such as Ozempic could mean so that fewer of us depend on knee replacements.

What investors need to decide is whether the pessimism about S&N’s future has been overblown and whether Nath’s much-vaunted 12-point plan will spark a recovery that will produce a significant rise in the stock.

First, let’s see what went wrong. S&N has three main divisions: orthopedics, sports medicine and advanced wound treatment. Before Covid, the company had operating margins of more than 20 percent, but this collapsed after the pandemic and the company had to struggle with supply chains and inflation, particularly in orthopedics.

Hell of a time: An aging population and a hip and knee replacement company should be a match made in heaven

Nath joined in April 2022 and implemented a new plan to fix the orthopedics division with better inventory management and training, while growing the other two divisions.

Last week’s first quarter trading update showed that much of this plan is on track. Orthopedics is growing outside the US, while sports medicine and advanced wound treatment are performing as expected.

On the other hand, the company is suffering from China’s new volume-based procurement strategy, which forces manufacturers to cut huge prices. This is affecting its sports medicine division, as struggles persist with its US market share for hips and knees. Analysts welcomed the numbers, although they slightly missed some forecasts for the first quarter.

Liberum healthcare analyst Seb Jantet says the United States is still struggling with hip and knee supply issues, but there is potential for improvement if the business resolves this.

He adds that volume-based acquisitions will reduce sports medicine and joint repair revenue by 5 percent.

Jantet predicts underlying growth of 5 percent for the full year and believes the company is undervalued.

“Stocks haven’t performed well since February and it’s not entirely clear why,” he says.

Julien Dormois of broker Jeffries agrees that the current share price weakness is an opportunity.

“Smith & Nephew is reaping the benefits of a portfolio shift toward faster-growing segments and recent R&D efforts, which support further, sustainable growth,” he says.

“We think the stock’s lackluster performance allows investors to revisit the case.”

However, there are headwinds, including problems in China and the possibility that the company will not meet its ambitious goals.

But this shouldn’t detract from the fact that the shares are attractively priced.

S&N pays a 3 percent dividend and trades at about 12 times expected 2025 earnings, meaning the stock is priced at 12 times the company’s expected earnings next year. This is its lowest forward earnings rating in over ten years.

Its closest rival, London-listed Convatec, trades at 18 times earnings, making it much more expensive.

There may be even more concerns about Nath’s remuneration, which he will only receive in full if he hits his targets, but this is a company that continues to actively innovate in robotic surgery and wound care.

Midas Verdict: As befits a company that got its start refining cod liver oil, the stock market seems to find Smith & Nephew’s turnaround plans a bit suspect.

Scarred by recent disruptions and concerned by the slow resolution of US supply chain issues, it will take very little to knock down confidence and therefore the stock price.

However, there is value for brave investors. The company works in increasingly necessary sectors and its innovations show that the company continues to advance.

S&N is far from perfect, but problems aside, the company is cheap and worth buying for short-term profits.

Traded in: London Stock Exchange Heart: S.N. Contact: smith-nephew.com or 0370 703 0047

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