It has been an unrewarding few years for shareholders in medical devices manufacturer Smith & Nephew (LSE: SN). But in early trading this morning (25 February), the market reacted to the company’s full-year results by pushing the Smith & Nephew share price up 9%.
Could this be the start of a turnaround for the shares – and ought I to buy now?
Solid company with real potential
Smith & Nephew has long been on my radar as a potential buy for my portfolio because I see a lot to like in the FTSE 100 company.
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Demand for medical devices is high and resilient. A global footprint and presence in multiple different areas of medicine gives Smith & Nephew economies of scale. It owns some powerful brands and technologies in its space and has in recent years been focussed on a growth plan.
The results contained a fair bit of good news. Full-year revenues rose 5%, while earnings per share were up 56%. Free cash flow more than tripled, to over half a billion dollars.
Not only did revenue grow, but so did profit margins at the trading level, something the company put down to its growth plan.
Management reckons there could be more to come. This year it is targeting “another year of strong revenue growth and a significant step-up in trading profit margin”.
Valuation is looking more attractive – but not enough
If that happens, I think it could boost investor confidence and possibly support a higher share price.
The market capitalisation after today’s results is around £9.9bn. Profits after tax last year came in at roughly £327m. So, the share continues to trade on a price-to-earnings ratio of 30.
Not only do I not see that as a bargain, I do not even see it as reasonably attractive for this business.
Smith & Nephew has had a mixed performance record for a fair few years now. While today’s results increase my confidence that the business is finally getting back on its feet and proving some of its growth potential, I reckon there is a lot of work still to be done.
On top of that, there are some risks that continue to threaten performance.
One is ongoing weakness in the China market (and that may also be an early warning sign of weaker demand in other markets over the next year or two). Another is inflation, threatening profit margins.
My take on the business
So, I still see this as a company with a lot of the right elements for long-term success. The results demonstrate that it is making strong progress and hopefully that will continue this year and beyond.
At the right price, I would be happy to add it to my portfolio. For now, though, I reckon the share price offers me insufficient margin of safety.
I will keep it on my watchlist, without investing at the moment.
