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Market crash: could this FTSE 100 stock be a recovery gem?

The FTSE 100 has slumped by 21% in the year-to-date following the market crash. Investors are still trying to determine the damage the coronavirus will do to the global economy.

In ordinary times, I hunt for companies selling products or services that are always in demand. Medical technology company Smith & Nephew (LSE: SN) would have firmly sat in this category. However, now things have changed, and the lockdown has hampered Smith & Nephew’s progress.

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I think it is now worth assessing whether or not Smith & Nephew is a stock that will rebound following the market crash.

Market Crash

The coronavirus outbreak has caused some hospitals around the world to halt non-essential procedures to alleviate pressure on healthcare systems.

However, things appear to be slowly turning back to normal, with hospitals proceeding with non-coronavirus related treatments. Those awaiting hip and knee replacements are likely to be behind patients awaiting urgent treatment for cancer and other time-sensitive procedures though. 

Smith & Nephew manufactures medical items, such as replacement hips, knees and shoulder joints. The business also provides acute and chronic wound management products. Its sports medication, ear, nose and throat business offers advanced products and instruments to repair and remove soft tissue.

Consequently, it will come as no shock that its Q1 results featured some seriously disappointing numbers. The company reported that Q1 revenue was 7.6% lower than the previous year. April underlying revenue was down by 47%, even when offset with improved trading conditions in China. Its 2020 guidance was withdrawn due to the coronavirus outbreak, a step that other businesses have taken in the market crash.

CEO Roland Diggelmann noted that “countries and healthcare systems around the world are facing an unprecedented challenge, and we are seeing a significant short-term impact”.

Diggelmann stated that the recovery in China is “encouraging, as is the restart of elective surgeries in many other countries, and especially within the US.

Recovery gem?

Despite short-term challenges, Smith & Nephew could be in a good position when things return to normal. The business has a strong balance sheet. Net debt was $1.8bn at the end of Q1 compared to $3.4bn of committed facilities.

The business is committed to cutting costs, earmarking up to $200m of savings in 2020.

As its products are usually in constant demand, Smith & Nephew shares are often bought for their defensive qualities. This translates to a stock price that is normally expensive.

However, following the market crash and a drop of 12% in its share price in the year-to-date, the stock is trading at a price-to-earnings ratio of 23. Signs are pointing to a recovery, with a rise of 15% since the beginning of April.

For those with a position in its stock, the next few months could be bumpy. However, for long-term investors, the market crash could have opened up a rare chance to pick up cheaper shares in a quality company.

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T Sligo 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.