There are many value stocks in the FTSE 100 right now. From banks to miners, a lot of shares are dirt cheap.
There’s one in particular that stands out to me, however. I reckon it’s probably the best value play in the Footsie at the moment.
A high-quality company
The stock I’m talking about is Smith & Nephew (LSE: SN.). It’s a healthcare company that specialises in joint replacement technology.
From an investment perspective, there’s a lot to like about this company.
For a start, it has an excellent long-term track record when it comes to generating wealth for shareholders. Believe it or not, the company has paid a dividend every single year since 1937 (the dividend yield is around 3% currently).
Meanwhile, looking ahead, it has attractive long-term growth prospects. That’s because the world’s ageing population is likely to result in more joint replacement surgeries (the joint replacement market is projected to grow by around 8% per year between now and 2030).
Big share price fall
However, in the last few years, Smith & Nephew’s share price has taken a huge hit. The hit has been so significant (roughly 50%) that the shares were recently near 10-year lows.
There are a few reasons the shares have fallen.
One is that the company has faced a lot of challenges due to Covid (many elective surgeries were postponed).
Another is that there have been concerns that GLP-1 weight-loss drugs will reduce the number of joint replacement surgeries in the future.
Investment opportunity
Now, I think this share price fall has created a huge investment opportunity.
Earlier this month, Smith & Nephew posted a trading update. And the numbers were strong.
For Q3, revenue was up 7.7% year on year to $1,357m.
And for 2023, the company said it was expecting growth to be at the high end of its 6-7% guidance.
“Overall, I am encouraged that our actions to transform Smith & Nephew to a consistently higher growth company are starting to deliver,” commented CEO Deepak Nath.
These numbers suggest the coronavirus-related slowdown could be over.
As for the weight-loss drugs concerns, these do add some uncertainty. However, I reckon the fears are overblown.
And a lot of City analysts have the same view.
For example, analysts at JP Morgan – who just upgraded the stock to ‘overweight’ (buy) from ‘neutral’ (hold) – noted that they believe the potential GLP-1 impact has been overplayed.
It’s worth pointing out here that Deepak Nath said last week that weight-loss drugs could actually help previously ineligible overweight patients get approval for joint replacement surgery.
So, I don’t think investors should be too worried about this issue.
Low valuation
After the recent share price fall, Smith & Nephew’s forward-looking price-to-earnings (P/E) ratio is about 12.
That’s a low valuation for a high-quality company like this.
To my mind, a P/E ratio of about 15-16 is probably warranted here.
That would imply possible share price gains of around 25-33% in the medium term.
That’s roughly in line with JP Morgan’s price target. Its target for the healthcare stock is 1,248p at present – about 26% higher than the current share price.
Of course, there’s no guarantee that the shares will re-rate to a higher valuation.
However, I reckon there’s a good chance they will rise from here, especially after the company’s recent trading update, which was very positive.
