FTSE 100 medical technology group Smith & Nephew (LSE: SN) is down 14% from its 10 September one-year traded high of £14.41.
This is despite full-year 2025 results released on 2 March showing its strongest operational performance in a decade. It came on the back of the completion of its three‑year 12‑Point Plan. This fixed supply issues, improved productivity, rationalised the portfolio, and restored growth in the key Orthopaedics division.
Given the disparate factors of a weaker price but stronger business, there could be a significant undervaluation here.
So, how much is it?
Strong earnings growth ahead
Ultimately, earnings (profits) growth drives any company’s share price higher. A risk to Smith & Nephew is a failure in any of its core products that could be costly to fix and could damage its reputation. Even so, consensus analysts’ forecasts are that its earnings will grow by an average 12.5% a year to end-2028.
This looks well-supported by its recently-released 2025 numbers. These saw trading profit jump 15.5% to $1.2bn (£0.9bn), lifting the trading margin by 160 basis points to 19.7%. This is the strongest profitability Smith & Nephew has delivered in a decade. Meanwhile, revenue rose 6.1% to $6.16bn, as supply constraints eased and execution improved.
Free cash flow surged 52.5% to $840m, reflecting both higher earnings and tighter working‑capital discipline. Return on invested capital also improved to 8.3%, even after absorbing the drag from portfolio rationalisation.
Positive momentum was broad‑based. Orthopaedics returned to growth, supported by improved logistics, stronger surgeon engagement and rising adoption of the CORI robotics platform. Sports Medicine & ENT remained the standout performer, with double‑digit growth in joint repair and strong uptake of REGENETEN and newer anchors and implants.
Management expects a 12%–13% return on invested capital, and a 9%–10% trading profit compound annual growth rate by 2028.
Together these factors point to a business with rising efficiency, expanding margins and a clear pathway to sustained value creation over the medium term.
How undervalued is it?
To gauge Smith & Nephew’s true worth, I ran a discounted cash flow (DCF) analysis. This estimates any firm’s fair value by projecting its future cash flows and then discounting them back to today. It does this using a rate that reflects the risk of owning the shares.
In this case, I used a discount rate of 8.6%, and a perpetual growth rate of 3.2% (the five-year average UK 10-year gilt yield). Other DCF models may use different inputs, which could produce lower valuations.
However, based on these numbers, my modelling suggests Smith & Nephew shares are 28% undervalued at their current £12.46 price.
That implies a fair value of £17.31 — considerably higher than today’s price.
And because asset prices can trade towards their fair value in the long run, it suggests a potentially excellent buying opportunity to consider today if those DCF assumptions hold.
My investment view
Aged over 50 now, I focus on high-yield stocks, which this is not — featuring a yield of 2.3%.
However, they could well suit investors looking for a business with improving profitability, rising cash generation and a credible multi‑year turnaround already showing through in results.
Meanwhile, I have been eyeing other discounted FTSE stocks with a high dividend yield.
