Can this Q3 update get the Smith & Nephew share price moving again?

After a few tough years blighted by the pandemic, the outlook might be getting a bit brighter for the Smith & Nephew share price.

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The Smith & Nephew (LSE: SN.) share price has fallen 40% over five years. But it’s been picking up a bit in the past few months.

And we just had a third-quarter update on Thursday (31 October). So what does the company, best known for its orthopaedics products, look like now?

Created with Highcharts 11.4.3Smith & Nephew Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Slower growth

In the quarter, revenue rose by 4%. But the Chinese market was a bit weak, and excluding China we saw 5.9% revenue growth.

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For the full year, the board now expects to post underlying revenue growth of 4.5%, down from previous guidance of 5%-6%. And that’s really down to China.

From 2025, Smith & Nephew expects “to expand our trading profit margin significantly to between 19.0% and 20.0%.”

We’re looking at a high-ish forecast price-to-earnings (P/E) ratio of 24 for the current year. But predicted rises in earnings in the next few years could drop that to under 15 as early as 2026.

Defensive stock

Smith & Nephew has been one of the leaders in the field of orthopaedics surgery for years, as well as sports medicine and wound management.

An ageing developed world population can surely only mean greater demand for hip and knee replacements, and the like. And growing wealth in the developing world could strengthen that further.

So this should be a strong defensive stock against all kinds of economic pressures… except, it seems, a global pandemic.

That’s the kind of thing that pushes elective surgery into the background. It delays non-urgent procedures, which would otherwise take up needed medical services and also worsen the risk of pandemic contagion.

Out of it

We’re out of all that now. And it boosts my confidence in the rosy projections that the analysts have down for the company.

But there’s a key lesson here for me. No investment can ever be defensive against all eventualities, and everything carries its own risk. And even if we don’t know what that risk is, it’s often something we just haven’t thought of yet.

Diversification, that’s the answer. Even that’s not foolproof, but it can seriously lower the danger.

In the next few years, I fear that global inflation, plus rising costs of raw materials and other source components, provide the main risk.

Growing East/West trade tensions could further damage a potentially lucrative part of the company’s market centred on China too, as we’ve just seen.

I like it

Still, even with the uncertainties, I like the look of Smith & Nephew now, and it’s on my Stocks and Shares ISA candidates list.

I’m always wary of broker price targets, but I think they can at least help me get a feel for market sentiment. And at the moment, there’s an average target of 1,350p for a 23% gain.

If it comes off, it could lift the projected 2026 P/E to only around 18. Earnings forecasts might be shaved back a bit due to weaker Chinese sales and push that up. But with improving growth prospects, I think I see the kind of safety margin I like.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Alan Oscroft has no position in any of the shares mentioned. 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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