Medical technology company Smith & Nephew‘s (LSE: SN.) one of my favourite FTSE 100 stocks. Currently, it’s the fourth largest individual Footsie holding in my entire investment portfolio.
This stock was hammered during the coronavirus pandemic and it’s still down 42% from its highs. But the good news is that it now appears to be making a fast recovery.
A new uptrend
In late October 2023, Smith & Nephew’s share price hit a 10-year low of 887p. I’m convinced that that was the bottom for the healthcare stock.
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Since then, the share price has been quietly starting a new uptrend. Currently, the stock’s above both its 50-day and 200-day moving averages (these are technical indicators that can be used to identify share price trends). And recently, it experienced a ‘golden cross’ – a pattern that indicates a stock’s turned a corner into a bullish phase.
Improving performance
It’s not hard to see why the stock’s rising again. Recently, results have shown the company – which specialises in joint replacement technology – is recovering from Covid disruption, and that its transformation plan (announced in 2022) is working.
For example, half-year results posted in early August showed a 5.6% increase in revenue. Meanwhile, trading profit came in at $471m, up 12.8% year on year and ahead of analysts’ forecast.
Encouragingly, CEO Deepak Nath said that there’s scope for further progress: “There is still more work to be done and we expect to see further progress in the second half of the year.”
Still cheap
Looking at today’s valuation, I see plenty of room for further share price gains. Currently, analysts expect Smith & Nephew to generate earnings per share of 110 cents next year. So at today’s share price, the forward-looking price-to-earnings (P/E ratio) here is about 13.9.
That’s relatively low for a high-quality healthcare business. If the company was able to show that it’s firing on all cylinders, I wouldn’t be surprised to see the P/E ratio rise to somewhere between 18 and 20 (meaning the shares could potentially rise up to 44% from here).
It’s worth noting that back in July, activist investor Cevian Capital disclosed a 5% stake in the company. So it clearly sees value in the stock.
At the time, the firm – which is known for taking stakes in businesses and calling for change – said it saw the potential to create ”significant long-term value” by improving the operating performance of the medical technology company.
I’m bullish
Now, there’s no guarantee the shares will keep rising from here, of course. This company operates in a competitive industry, and it’s up against some formidable rivals.
Another risk is GLP-1 weight-loss drugs. These could have an impact on the dynamics of the joint replacement industry (less body weight, less pressure on joints).
All things considered however, I’m bullish on this stock. With the world’s ageing population likely to boost the joint replacement market in the years ahead, I see a lot of investment appeal.
