Is this the most undervalued FTSE stock?

This FTSE stock has been in the wars since the start of the pandemic, and it can’t seem to buck the trend. Could this be the index’s most undervalued stock?

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Smith & Nephew (LSE:SN) is a FTSE 100 stalwart. It currently has a market cap of £8.5bn and it’s one of the most respected medical device manufacturers around the world. However, things haven’t been going to plan for the company and its investors.

While a turnaround is on the corner, is it time we started seeing this hip replacement specialist as a slam dunk bargain?

Share price targets

When I’m looking to assess how much a company should be worth, I often find the best place to start is the share price targets. These are targets created by City and Wall Street analysts, and when compiled into a consensus opinion, they can be incredibly useful.

In the case of Smith & Nephew, we can see that the stock has no ‘Sell’ or ‘Underperform’ ratings. In fact, there are nine ‘Buy’ ratings, four ‘Outperform’ ratings and five ‘Hold’ ratings. That’s a very good sign.

But what’s an even stronger sign is the average share price target, which is currently £13.11. That’s a considerable 34.8% above the current share price. In the current market, I’d suggest we don’t often see stocks that analysts contend to be that undervalued.

Of course, there’s a few caveats here. Firstly, it’s a little lazy just to use other people’s analysis. But secondly, these ratings aren’t always updated that often. This is especially the case for less prominent companies. As such, ratings and share price targets can get outdated. It’s often good practice to discount those published more than three months ago.

Value improving

In February, the medical device giant reported fourth-quarter revenue of $1.46bn, marking a 6.4% increase on an underlying basis. For the year as a whole, the company surpassed expectations with underlying revenue up 7.2%. For 2024, Smith & Nephew remained positive, suggesting further revenue growth in the range of 5% to 6%.

For 2024, analysts are now anticipating the company will deliver earnings per share of 46p. That will rise to 60.3p in 2025, and 73.1p in 2026. That’s 16.7% growth over the medium term. As a result, Smith & Nephew is currently trading at 21 times forward earnings. This then drops to 16 times in 2025, and 13.2 times in 2026.

In turn, that’s a price-to-earnings-to-growth (PEG) ratio of 1.25. If the company didn’t pay a dividend, this PEG ratio would suggest the company is overvalued. But given the 3.4% dividend yield, it’s inconclusive.

P/ESmith & NephewJohnson & JohnsonMedtronic
20242114.316.2
20251613.815.4
202613.213.413.2

It’s always important to compare this data with peers in the same sector, and that’s what I’ve done above. As we can see, towards the end of the forecasting period, Smith & Nephew in trading in line with its peers. It’s also growing faster so could be in better shape.

The bottom line

The advent of effective weight loss drugs has certainly made some analysts wary. After all, obesity is a major reason people need joint replacements. And these drugs have compounded the negative impact of the pandemic on the business.

Nevertheless, I think the long-term picture is positive. There’s certainly enough catalysts in our ageing populations. It might not be the whoppingly undervalued stock that the average share price target suggests, but I certainly think it’s trading below fair value.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Smith & Nephew Plc. The Motley Fool UK has recommended Smith & Nephew Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d target passive income from FTSE 250 stocks right now

Dividend stocks aren't the only ones we can use to try to build up some long-term income. No, I like…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

If I put £10k in this FTSE 100 stock, it could pay me a £1,800 second income over the next 2 years

A FTSE 100 stock is carrying a mammoth 10% dividend yield and this writer reckons it could contribute towards an…

Read more »

Investing Articles

2 UK shares I’d sell in May… if I owned them

Stephen Wright would be willing to part with a couple of UK shares – but only because others look like…

Read more »

Investing Articles

2 FTSE 250 shares investors should consider for a £1,260 passive income in 2024

Investing a lump sum in these FTSE 250 shares could yield a four-figure dividend income this year. Are they too…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

This FTSE share has grown its decade annually for over 30 years. Can it continue?

Christopher Ruane looks at a FTSE 100 share that has raised its dividend annually for decades. He likes the business,…

Read more »

Elevated view over city of London skyline
Investing Articles

Few UK shares grew their dividend by 90% in 4 years. This one did!

Among UK shares, few have the recent track record of annual dividend increases to match this one. Our writer likes…

Read more »

Investing Articles

This FTSE 250 share yields 9.9%. Time to buy?

Christopher Ruane weighs some pros and cons of buying a FTSE 250 share for his portfolio that currently offers a…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

As the NatWest share price closes in on a new 5-year high, will it soon be too late to buy?

The NatWest share price has climbed strongly so far in 2024, as the whole bank sector has been enjoying a…

Read more »