As UK share prices plummet, I’m now seeing a plethora of options on the Footsie that are significantly undervalued. However, one company in particular has caught my eye as a potential value stock.
A medical firm with a strong history
The company I’m looking at is Smith & Nephew (LSE: SN.). With strong financials and a stellar track record of consistently paying out annual dividends for over eight decades, I feel confident this stock will bounce back. Currently at 1,032p, the price remains a far cry from this year’s high of 1,314p. But that is a step up from last month’s low of 896p.
Smith & Nephew is an international healthcare firm specialising in the regeneration and replacement of soft and hard tissue. It deals with advanced wound and trauma management while developing products for arthroscopy, clinical therapy, and orthopaedic reconstruction.
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Despite its impressive history, the company has recently suffered a substantial share-price plummet, falling to lows not seen in almost 10 years. The fall in price started during the pandemic due to delays and cancellations of operations. It was then further compounded by more recent concerns about the impact of weight-loss drugs on regenerative joint surgeries.
An undervalued stock
However, I’m viewing this downturn as a potential investment opportunity. Recent strong financials have prompted a mild recovery and hint at the potential for a turnaround for Smith & Nephew. With Q3 revenue up 7.7% year on year and optimistic growth projections for 2023, it seems to me the stock is a good option for securing some decent returns.
It currently has a forward-looking price-to-earnings (P/E) ratio of about 12, which is significantly lower than its historical valuation. To me, this puts Smith & Nephew in undervalued territory because a more reasonable P/E ratio closer to 15 would imply considerable medium-term share-price gains of around 30%.
However, the company’s latest results revealed trading profits were down 5% year on year. This is significantly lower than analysts predicted, so I’m erring on the side of caution until a full recovery is confirmed.
Big-name investors are on board
Goldman Sachs recently shared a similarly positive outlook, announcing a forecasting price target of 1,400p for Smith & Nephew shares. “The cumulative underperformance since 2019 is more than 45%,” it said. “We think that is set to change.” The bank believes European Medtech has significantly underperformed in three of the last four years, dragging the sector down by around 12% year-to-date.
Analysts at JP Morgan agree, arguing that concerns regarding weight-loss drugs are overstated. Like Goldman Sachs, the bank is also bullish on Smith & Nephew stock, putting forward a slightly more conservative price target of 1,248p, approximately 26% higher than the current share price.
As always, and especially with today’s economic landscape, no guarantees exist. Markets are becoming increasingly volatile and any stock picks require careful scrutiny. But with the recent positive sentiment and rapidly improving price, I see a future with more upward momentum for Smith & Nephew.
