Is this unloved FTSE 100 hero about to make investors rich all over again?

Investors loved this FTSE 100 stock just a few years ago, but things took a turn for the worse. This Fool is now expecting a recovery.

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I’m wondering if this long-struggling FTSE 100 stock could be heading into a growth cycle? In my experience, most things tend to follow cycles and I think markets are no different.

After all, it’s no coincidence the saying ‘history repeats itself’ is a popular one.

Global markets have certainly seen some ups and downs since I was born. From Black Monday in the late 80s, the dot-com bubble in the late 90s, the 2008 financial crisis, and then Covid in 2020. And some stocks seem to fall in and out of favour too. 

This one in particular caught my attention lately. 

Smith & Nephew

The Smith & Nephew (LSE: SN.) share price is down 46% since Covid hit in early 2020. But even before that, problems began to show at the medical equipment manufacturer. After skyrocketing 30% in early 2019, it hit a snag and fell sharply.

Before that, however, it had been growing steadily for over three decades. Now I believe it’s once again showing signs of regaining the strength of the past. 

But it’s not a popular attention-grabbing brand like Rolls-Royce or Coca-Cola, nor is it groundbreaking new tech stock. And since selling its consumer goods division in 2020, it’s focused entirely on manufacturing advanced technological medical devices.

So now it needs to make-it-or-break in the competitive world of sports medicine and orthopaedics.

Turnaround plan

In 2022 it announced a 12-point plan aimed at increasing profitability and improving returns for shareholders. In the months following, the share price increased 30%. But like many FTSE 100 stocks, 2023 hit it hard and all those gains disappeared.

Now, with the UK market in recovery and inflation dropping, the recovery plan may finally get a chance to shine. The stock is up 15% since hitting a low of £8.96 last October and the most recent 2023 full-year (FY) results were good. Underlying revenue and trading profit were up 7.2% and 7.6% respectively, with a 16% increase in earnings per share (EPS).

Risk factors

Strong results aside, the company does have some concerning financials. First, a price-to-earnings (P/E) ratio of 43.8 is high by any measure. The medical equipment industry average is already high at 30.8 and it’s even higher than that. It’s forecast to reduce by half in the next 12 months based on an expectation of positive earnings growth but there’s no guarantee of that.

Second, the firm does hold a fairly significant debt load of £2.3bn. That’s not unsustainable for a £9bn company but it could put pressure on operational expenses, particularly if demand for joint replacement technology subsides. While I think that’s unlikely, advances in GLP-1 weight-loss drugs aimed at reducing joint pressure in the elderly could be a factor.

My verdict

Overall, I see a very promising stock that’s trading near the lowest price it’s been in years. I also see a company assessing its position and recalibrating operations to its advantage. That sounds like an opportunity that, while not without risk, is worth my investment.

Since I already have a few underperforming stocks I’ve been meaning to offload, I should have some spare cash soon. Once I do, I plan to spend that capital on Smith & Nephew shares.

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.

Mark Hartley has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc and 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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