Keep An Eye On Smith & Nephew plc & Shire plc Now!

In a way, Smith & Nephew plc (LON:SN) and Shire plc (LON:SHP) have many similarities, 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) has lost 7.5% of value in less than a day after US rival Stryker announced a $2bn stock buyback programme. That shouldn’t have come as a surprise — I did warn you earlier this year, after all. 

While Stryker may abandon its ambitious plan to buy the UK medical device maker, weakness in Smith & Nephew stock indicates that it may be a good time to add it to your wish list. But at what price should you actually buy into the stock? Here is my answer, and here’s why you should also pay attention to Shire‘s (LSE: SHP) rally, which looks rather convincing. 

Outlook

“I am not a fan of the concept ‘big is beautiful,'” Smith & Nephew chief executive Olivier Bohuon said at a conference on healthcare in January, when it was on the verge of receiving a takeover offer according to market rumours. To be fair, the company has been a takeover target for about a decade: its equity value has doubled over the period, but most of the gains in its stock value have come in the last 24 months. 

Of course, Smith & Nephew shareholders are concerned now — but Mr Bohuon may be right.

If so, the company will likely continue to deliver value to shareholders for a long time, and a 7.5% drop in its stock price should be perceived as positive news for value hunters. After all, Smith & Nephew is expected to deliver higher revenue growth in 2015 than in 2014, while a further improvement in trading profit margins seems likely. Positive contribution to net earnings is also expected to come from a marginally lower corporate tax rate. 

Furthermore, currency swings may have a minimal impact on 2015 revenues: its balance sheet is solid, and net leverage is manageable. Finally, core profitability may rise faster than expected on the back of ad-hoc cost-cutting measures, so there could be room for an increase in the payout ratio.

S&N is still expensive, however, so I am not saying it is time to buy. But this is one stock to watch, particularly if its valuation drops another 20% or so from here to around 900p. Incidentally, Johnson & Johnson and private equity firms could easily put forward opportunistic bids if S&N traded in the 800p-950p range.

Shire On A Roll

Shire, another company operating in the broader pharmaceutical world, is a different story. Its shares have drawn my attention for a few weeks now.

Shire shareholders were under pressure to sell when the merger with AbbVie was called off in mid-October, but since then weakness in their shares has turn out to be a great buying opportunity: the shares have recorded a 39% pre-tax return, excluding dividends.

Shire is drawing lots of attention from analysts, too — and rightly so. Goldman Sachs suggests a price target of 6,400p, which is way too bullish, but a 10% rise to 5,700p is very possible to the end of the year.  

Shire is a solid company that has proven to be able to allocate capital efficiently over time. It’s a tad more expensive than S&N — which is justified by a higher growth rate, higher profitability, lower net leverage and a decent pipeline of drugs — but there you go: high-quality stocks do not come cheap.

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 no position in any of the shares mentioned. 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

1 FTSE 250 share that can soar like the Rolls-Royce share price

The Rolls-Royce share price has grown almost fivefold since the start of 2023. Muhammad Cheema takes a look at a…

Read more »

Close-up of British bank notes
Investing Articles

How I’d invest my £20K ISA allowance to target £1,380 of passive income annually

Christopher Ruane explains the approach he'd take to try to generate income of almost £1,400 next year -- and annually…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

2 super-safe dividend stocks that have been paying passive income for decades

Income from stocks is never nailed on. But there are a handful of UK dividend stocks that have been incredibly…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Diageo: time for me to sell this FTSE 100 stock before 5 November?

As the US election draws ever closer, our writer is wondering what to do with this struggling FTSE 100 stock…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Trading at 28 times earnings, is there value in this FTSE 250 stock?

Our writer Ken Hall takes a deep dive into a recent FTSE 250 addition that has rocketed higher since its…

Read more »

Market Movers

Amazon stock shoots higher after earnings! Here’s what I think happens next

Jon Smith explains why Amazon stock has jumped following the latest results and why the outlook could keep the rally…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

After jumping 10% this morning is this hated FTSE 100 stock suddenly a screaming buy for me?

Harvey Jones rejected any thought of buying this former FTSE 100 darling in August but after some positive news should…

Read more »

artificial intelligence investing algorithms
Investing Articles

Down 12% in a month and yielding 10.7%! Is this November’s best passive income stock?

Harvey Jones has been building his stake in this ultra-high-yielding FTSE 100 passive income stock. And with its shares dipping…

Read more »