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.

| 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.

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?

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.

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.

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.

More on Investing Articles

Growth Shares

3 wide-moat FTSE 100 stocks that offer value today

These FTSE 100 companies have some of the widest economic moats in the index. And right now, Edward Sheldon believes…

Read more »

Investing Articles

Yielding 10.6% after a 20% decline, are abrdn shares simply too cheap to ignore?

Buying a falling knife can be a risky strategy, but Andrew Mackie believes the abrdn share price decline might be…

Read more »

Investing Articles

£20,000 in savings? Here’s how I’d aim to turn that into passive income of £994 a month

A Warren Buffett investment from 1994 returns 60% each year in dividends. With enough time, could Stephen Wright achieve a…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

If I’d put £20,000 into a FTSE 100 tracker a year ago, here’s what I’d have now

The FTSE 100 is having a great year so far this year, and it seems overdue. What's the best way…

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

BP share price decline is presenting a gift for value investors

As the BP share price decline accelerates following disappointing earnings, this Fool’s long-term bullish stance has not changed.

Read more »

Investing Articles

1 S&P 500 company from my ‘best stocks to buy now’ list

Zaven Boyrazian explains why this cheap-looking S&P 500 growth enterprise is on his ‘best stocks to buy now’ list for…

Read more »

Investing Articles

Down 70%, is this former FTSE 100 name set to explode like the Rolls-Royce share price?

The Rolls-Royce share price has already flown, but Roland Head wonders if this famous FTSE 250 faller could be the…

Read more »

Black father and two young daughters dancing at home
Investing Articles

2 dividend stocks I’d buy for a lifetime of passive income

The London Stock Exchange is filled with lucrative dividend stocks waiting to be discovered. Here are two long-term winners on…

Read more »