The Smith & Nephew (LSE: SN.) share price is down 21% over five years, though it has been ticking up a bit the past few months.
The medical technology firm released full-year 2023 results on 27 February. And that gave the shares a modest extra push early on, up 1% in morning trading.
Rising earnings
Broker forecasts show earnings rising quite strongly for the next couple of years. So how did 2023 go?
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We saw underlying revenue growth of 7.2% in the year, which is more than expected. Adjusted earnings per share came in at 81.8 cents, and the full-year dividend was maintained at 37.5 cents.
On those figures, we’re looking at a price-to-earnings (P/E) ratio of 17.4 and a 2.7% dividend yield. That valuation might not sound super cheap. But with growth forecasts ahead, I think it might prove to be a bargain buy right now.
CEO Deepak Nath told us the firm’s actions “have begun to translate into meaningful financial outcomes.” And he added: “We delivered revenue growth ahead of guidance for the full year and made important improvements to our trading profit margin against a challenging macro-environment.“
Turnaround?
If Smith & Nephew’s turnaround plan really is starting to bear fruit, then I reckon this could turn out to be a great time to consider buying. We’re already seeing a modest rise in earnings, and the outlook suggests we could be in for more.
The board says it’s “targeting another year of strong revenue growth and a further expansion of trading profit margin“.
To put numbers on that, the current outlook is for a 5-6% rise in underlying revenue. We should also see a trading profit margin of at least 18%, slightly ahead of 2023’s 17.5%. And this edges up a bit on earlier guidance.
It’s perhaps not roaring growth. But it’s the kind of steady progress that could bring the P/E down nicely in the next few years.
Risks ahead
What pressure will Smith & Nephew face in 2024? The key risks the company identified include continuing inflation, which isn’t coming down quickly in all of its markets.
Then there’s the effect of a slowdown in Chinese business, which has been a drag.
One comment from the CEO struck me. He spoke of “almost half of our 2023 growth coming from products launched in the last five years“.
That sounds impressive, but it also brings a thought that makes me a bit wary. Might it suggest the firm’s products don’t have a long lifespan? I don’t think it does. I’ve encountered the company’s orthopaedic products in a previous job — and they seem to be very well regarded, especially in the US.
But the uptake of new products in the next few years does add extra uncertainty. And opportunity.
My verdict
So what’s my take on Smith & Nephew as a potential buy? I think we could be looking at a rare example of a FTSE 100 growth stock here. One entering a new growth phase, at least. At the current share price, I’d say it’s definitely worth considering.
