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?

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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 As such, ratings and share price targets can get outdated.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.

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