Smith & Nephew (LSE: SN.) shares have taken a big hit over the last few years. Before Covid, shares in the orthopaedics company were trading around the £20 mark. Today however, they can be picked up for around £12.
Is this a great buying opportunity for long-term investors? Let’s take a look.
Why the share price fell
Smith & Nephew has certainly faced its fair share of challenges in recent years. During the Covid pandemic, many elective surgeries were postponed. This had a big impact on the company’s sales.
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The firm has also faced supply chain issues. In recent years, hip and knee implants have become unexpected casualties of raw material shortages.
On top of this, Smith & Nephew has had to deal with inflationary pressures. Margins have been hit by higher commodity and wage costs.
Finally, growth has been also impacted by currency issues, as the company reports in US dollars.
Overall, the operating environment has been very challenging.
Improving outlook
It now looks like Smith & Nephew is starting to turn the corner however.
In a recent trading update, the healthcare company advised that for 2023, it expects revenue growth of 5-6%, above the level of 4.7% reported for 2022.
It also said it expects its medium-term trading profit margin to expand to at least 20% in 2025, versus 17.3% in 2022, on the back of productivity improvements.
We expect to deliver both faster revenue growth and margin expansion in the coming year, and are setting a solid foundation for our mid-term ambitions as we transform to a consistently higher growth company.
Smith & Nephew CEO Deepak Nath
This is all very encouraging.
Looking further out, the prospects for the company remain attractive, to my mind.
This is a business that is well-placed to benefit from the world’s ageing population. Higher numbers of over 65s globally should drive demand for orthopaedic products.
According to Precedence Research, the market for knee implants is expected to grow by around 6% a year between now and 2030.
Valuation
As for the stock’s valuation, it’s relatively attractive right now, to my mind.
Currently, analysts expect Smith & Nephew to generate earnings per share of 85.3 cents for 2023. That puts the stock on a forward-looking price-to-earnings (P/E) ratio of around 17.
Now that multiple is higher than the FTSE 100 average. However, it’s significantly lower than that of US-listed rival Stryker, which currently has a P/E ratio of about 26.
At the current valuation, I think there’s potential for multiple appreciation if the company can demonstrate that business performance is improving and its transformation plan is working.
Attractive risk/reward
Of course, there are risks here. In the company’s recent results, it noted that it will continue to face macroeconomic headwinds in 2023.
It’s worth pointing out that Smith & Nephew did not recently increase its dividend for 2022. This suggests that management is a little cautious about the future.
Overall however, I like the risk/reward proposition right now. At the current share price, I see the stock as a buy.
