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Blacksmith and nephew (LSE: SN.) shareholders got a Halloween scare today (31 October) as FTSE 100 Shares plummeted as much as 13.7%. Does this sharp drop make the medical equipment maker a valuable stock? And if so, is now the time to jump in and buy?
What happened
Smith & Nephew manufactures hip and knee replacements, Surgical instruments for sports injuries and wound care solutions.. It's a truly global business, as highlighted in today's third-quarter trading update, where China emerged as the main culprit for the stock's decline.
The company saw weaker-than-expected demand for its surgical products in the world's second-largest economy. This meant third-quarter revenue rose 4% year-over-year to $1.4 billion, but missed analyst expectations for 5.2% growth.
Excluding China, revenue growth was 5.9% on both an underlying and reported basis. However, management says “China headwinds to continue through 2025“.
As a result, the company expects annual underlying revenue growth of 4.5%, compared to a previous forecast of 5%-6%. However, by 2025 it hopes to expand its “trading profit margin significantly between 19% and 20%“.
CEO Deepak Nath added: “We remain convinced that our transformation into a higher-growth company, with the ability to drive operating leverage to the bottom line, is on the right path.“.
Bargain stocks?
While the share price is down more than 40% in the last five years, that doesn't make the stock any cheaper. Profits and margins were greatly affected by the pandemic and high inflation, as we can see below.
The company is just beginning to get back on track, so this news is a setback.
Earnings forecasts might be a little low now, as weakness in China is expected to continue through 2025. But from the latest numbers I can see, we're looking at a price-to-earnings (P/E) ratio of around 13. by 2025.
If the company ultimately manages to drive revenue growth and increase margins, as management has set out to do, then the stock could very well prove to be a high value stock at the current price.
The long term
Of course, China is the wild card here. We are seeing several companies reporting extreme weakness there. And trade conditions could always worsen over the next two years, despite Beijing's best attempts.
Global inflation could also begin to rise, putting pressure on margins. Therefore, I wouldn't call this an “obvious” action.
However, from a broader perspective, there is still a lot to like. According to the United Nations, the number of people aged 65 and over worldwide is expected to double, from 761 million in 2021 to 1.6 billion in 2050. The number of people aged 80 and over is growing even faster .
Many more hip, knee and other joint replacements will surely be needed in the future. And that should eventually benefit Smith & Nephew, whose largest division is orthopedics (40% of revenue last year).
Would you invest?
In my own portfolio, I chose the pioneer of robotic surgery. Intuitive Surgical to gain direct exposure to this global aging trend. But this is about as far from a value stock as you can get.
If you wanted a cheaper way to touch on this topic, you would consider Smith & Nephew stock after today's big drop.
