I have been holding Smith & Nephew (LSE:SN) shares for about 18 months, but I’m disappointed as the growth I anticipated hasn’t materialised. This medical device giant, specialising in orthopaedic products and wound care solutions, experienced a decline in demand during the pandemic, due to postponed elective surgeries.
Unfortunately, the stock has declined by 25% over the past three years. The big question now is whether Smith & Nephew’s share price will experience a significant upturn in the near future. Let’s take a closer look.
H1 forecasts
Smith & Nephew is scheduled to release its H1 and Q2 results on 3 August. Analysts predict a 5.9% year-on-year increase in revenue to $1.36bn for the quarter, and a 6.4% revenue growth for the first half, amounting to $2.72bn.
However, the positive revenue trend doesn’t translate to mid-single digit profit growth. Analysts expect a trading profit of $442m for the first half of the year, merely $2m higher than the first half of 2022, and a decline from $459m in 2021.
Margins may continue to face pressure as inflation remains high globally, including in the UK, during the reporting period. Trading margins are anticipated to fall to 16.2%, down from 16.9% in H1 2022, and 17.6% in H1 2021.
Consequently, the median EPS estimate for the period is ¢36, lower than the ¢38.1 and ¢38.8 figures from the previous two years respectively.
Waiting for growth
As investors, we all seek indications of a company’s progress and, currently, Smith & Nephew isn’t showing significant improvement. EPS is projected to improve in the second half, reaching ¢80 for the year, slightly lower than ¢81.8 in 2022 and ¢80.9 in 2021.
Presently, the company trades with a price-to-earnings (P/E) ratio of 18.7, and a forward P/E closer to 19. While not excessively expensive, it does command a premium compared to the FTSE 100’s average P/E of approximately 14.
This premium is common in the healthcare sector due to its resilience and increasing demand for medical products in light of ageing populations worldwide, but notably in developed nations.
The long-term investment hypothesis for Smith & Nephew aligns with this trend. With ageing populations and a huge backlog for elective surgeries, demand for orthopaedic products and wound care solutions should see a significant uptick over the coming years.
Moreover, with Covid-19 concerns easing, supply chain disruptions waning, and inflation expected to moderate, the operating environment should brighten. In turn, this should lead to a margins recovery in the medium term. Coupled with the long-term demand story, I find this is a highly attractive stock.
While Thursday’s results may not cause the stock to soar, I view the current lower share price as an opportunity to purchase a quality stock with the potential for long-term growth at a discounted price.
When I have the capital available, I’ll look to top up.
