The Smith & Nephew (LSE: SN) share price jumped as much as 8% higher in early trading today after the medical technology giant issued a positive Q3 trading update. The company said that while it now expects underlying revenue growth for the full year to be in the lower half of its 2% to 3% range, it anticipates a trading profit margin above that achieved in 2017, as a result of a favourable legal settlement and improved cost control.
I’ll come back shortly to why I’d be happy to buy this FTSE 100 stock today and hold it for the long term, but first I want to tell you about a smaller company in the healthcare sector. This firm’s share price is well over 50% below its high of last year but I believe it could be on the verge of a major recovery.
Vectura (LSE: VEC) is an industry-leading designer of medical devices that enhance the delivery and performance of inhaled products to help patients suffering from airways diseases. It also develops high-quality generic alternatives to branded therapies.
The company experienced a challenging 2017 and the decline in its share price saw it demoted from the mid-cap FTSE 250 index to the SmallCap index. However, having refocused its portfolio prioritisation and implemented initiatives to transform R&D productivity, the business has been regaining momentum recently.
Looking to next year’s earnings — a consensus forecast increase of over 40% to 4.8p a share, according to Reuters — I reckon there’s considerable upside potential for investors today at a share price of 72p (market cap £479m). I’d be happy to buy this stock for its recovery prospects.
Unlocking growth potential
Smith & Nephew, which last month was named by my colleague Kevin Godbold as his top stock to buy, is a bigger, more stable business than Vectura, with a market cap of £11.8bn at a current share price of 1,350p. For this reason, and because ageing populations and more active retirees provide long-term rising demand for many of its products, it is a stock I believe can thrive for decades to come.
Current chief executive Namal Nawana arrived in the summer with a track record of energising businesses to deliver better performance and greater value to shareholders. He’s confident he can do this at Smith & Nephew, with what he describes as the group’s “excellent product portfolio with numerous best-in-class medical technologies.”
We should get full details of his strategic plans early next year, but today’s update told us of one major change already being implemented, which is aimed at unlocking the firm’s growth potential. This is a new global commercial model, including a president responsible for each of the company’s three specialised global marketing franchises: Orthopaedics, Sports Medicine/ENT and Wound.
Discount to peers
The current share price represents 18.5 times this year’s forecast earnings of $0.94 a share (72.9p at current exchange rates) and 17.4 times next year’s pencilled in $1.00 (77.5p). The earnings rating and a modest 2% running yield on a $0.35 (27.1p) dividend put Smith & Nephew on a premium rating versus the FTSE 100 average.
However, I see the shares as a ‘buy’ because the company looks great value against its own sector peers. Indeed, in a research note this morning, analysts at Exane said the stock is trading at a 10-year high discount of 20% against US peer Stryker.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.