Why Now Is A Great Opportunity To Take Profit On Takeover Target Smith & Nephew plc

Smith & Nephew plc (LON:SN) is not an opportunity at this price, argues this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Smith & Nephew (LSE: SN) (NYSE: SNN.US) is on a roll. If you are invested and you are perhaps tempted to cash in now, you may well be right. Here’s why. 

Performance/Premium

S&N shares have risen 7% since 23 December, when it was rumoured once again that S&N would be taken over by Stryker for about £13bn ($20bn). According to Bloomberg sources, S&N’s equity could be valued at almost 1,400p, for an implied 20% premium from its current level.

How realistic is such a price tag, though?

Should you invest £1,000 in Smith & Nephew Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Smith & Nephew Plc made the list?

See the 6 stocks

Firstly, S&N stock should trade below 900p to draw interest from investors, in my view.

Secondly, S&N is a prized asset but its shares had already gained 30% of value before Christmas Eve on the back of takeover rumours rather than meaningful operational improvements in 2014.

Value 

S&N’s share price rallied (+25%) to 1,100p in less than eight weeks to 10 June 2014. In those days, Zimmer had agreed to acquire Biomet for $13 billion, so investors decided to pay up for other takeover targets such as S&N in the sector. 

Based on S&N’s enterprise value (EV) divided by revenue, and EV/adjusted operating cash flow, the shares already trade in line with their mid-cycle multiples — and also trade at an implied 25% discount to peak-cycle multiples. In short, they are pretty expensive. 

While consolidation for medical device makers is on the cards, it’s unlikely that any buyer would be willing to offer a meaningful premium to S&N’s current valuation of 1,165p — although, admittedly, S&N could be broken up, while certain assets could be flipped to private-equity firms at a marked-up price. 

Another issue is that a tax-inversion deal isn’t likely to happen any time soon, although a smaller number of bigger players are competing in a sector where Medtronic and Johnson & Johnson may also decide to grow their asset base inorganically and, equally important, could deploy lots of cash held abroad.

S&N Is Not Cheap 

A full bid at 1,400p a share would value S&N at almost £13bn, for an implied forward adjusted operating cash flow multiple of about 11x — which seems a rich valuation for a business whose cost-cutting potential is more attractive than its organic growth prospects at this point in the business cycle. 

S&N stock is currently valued at a high multiple of 29x forward earnings, and trades 5% above the average price target from brokers, which are bullish, of course, about M&A prospects in a sector where rising costs point to more deal-making to preserve operating margins. Both S&N and larger players must also preserve market share as hospital consolidation in the US leads to lower budgets, which in turn puts pressure on suppliers’ profits. 

Yet do you recall what happened to the value of Shire when merger talks with AbbVie collapsed in October 2014? I would bet on a similar, painful outcome for S&N shareholders this year… 

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended Glaxo and Shire. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 FTSE 100 and FTSE 250 stocks to consider as stock markets plummet!

Looking for lifeboats as growth-crushing trade tariffs loom? Here are two (including a FTSE 100 gold stock) I think merit…

Read more »

Number three written on white chat bubble on blue background
Investing Articles

Just released: the 3 best growth-focused stocks to consider buying in April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

£10,000 invested in Watches of Switzerland shares 1 year ago is now worth…

Watches of Switzerland shares have been decimated by Trump’s tariffs on Switzerland. Dr James Fox explores whether this is an…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

Growth stocks are crashing! Here’s what I’m doing now

Our writer shares his thoughts as growth stocks get crushed, as well as a favourite from the Nasdaq that he…

Read more »

Investing Articles

What’s going on with the Nvidia share price now?

The Nvidia share price is tanking. Once the most valuable listed company, Nvidia has seen more than $1trn wiped off…

Read more »

Investing Articles

This FTSE AIM stock has £2.3bn in net cash, and a market cap of £2.4bn!

I love this FTSE AIM stock, but it really hasn’t delivered for me yet. The stock trades with crazily low…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Down 15% in a week! Are these 5 FTSE 100 fallers screaming buys as markets plunge?

Five of Harvey Jones's favourite FTSE 100 stocks all have the same thing in common – they've fallen around 15%…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

2 stocks that have been crushed and now offer a ton of value

Edward Sheldon has been scanning the market for stocks that offer value after the sell-off. Here are two shares he…

Read more »