The Smith & Nephew (LSE: SN.) share price has fallen 40% over five years. But it’s been picking up a bit in the past few months.
And we just had a third-quarter update on Thursday (31 October). So what does the company, best known for its orthopaedics products, look like now?
Slower growth
In the quarter, revenue rose by 4%. But the Chinese market was a bit weak, and excluding China we saw 5.9% revenue growth.
For the full year, the board now expects to post underlying revenue growth of 4.5%, down from previous guidance of 5%-6%. And that’s really down to China.
From 2025, Smith & Nephew expects “to expand our trading profit margin significantly to between 19.0% and 20.0%.”
We’re looking at a high-ish forecast price-to-earnings (P/E) ratio of 24 for the current year. But predicted rises in earnings in the next few years could drop that to under 15 as early as 2026.
Defensive stock
Smith & Nephew has been one of the leaders in the field of orthopaedics surgery for years, as well as sports medicine and wound management.
An ageing developed world population can surely only mean greater demand for hip and knee replacements, and the like. And growing wealth in the developing world could strengthen that further.
So this should be a strong defensive stock against all kinds of economic pressures… except, it seems, a global pandemic.
That’s the kind of thing that pushes elective surgery into the background. It delays non-urgent procedures, which would otherwise take up needed medical services and also worsen the risk of pandemic contagion.
Out of it
We’re out of all that now. And it boosts my confidence in the rosy projections that the analysts have down for the company.
But there’s a key lesson here for me. No investment can ever be defensive against all eventualities, and everything carries its own risk. And even if we don’t know what that risk is, it’s often something we just haven’t thought of yet.
Diversification, that’s the answer. Even that’s not foolproof, but it can seriously lower the danger.
In the next few years, I fear that global inflation, plus rising costs of raw materials and other source components, provide the main risk.
Growing East/West trade tensions could further damage a potentially lucrative part of the company’s market centred on China too, as we’ve just seen.
I like it
Still, even with the uncertainties, I like the look of Smith & Nephew now, and it’s on my Stocks and Shares ISA candidates list.
I’m always wary of broker price targets, but I think they can at least help me get a feel for market sentiment. And at the moment, there’s an average target of 1,350p for a 23% gain.
If it comes off, it could lift the projected 2026 P/E to only around 18. Earnings forecasts might be shaved back a bit due to weaker Chinese sales and push that up. But with improving growth prospects, I think I see the kind of safety margin I like.
