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FTSE 100 healthcare stock Smith & Nephew (LSE: SN.) just had a bad week. On Thursday (31 October), it fell a whopping 12.5%.
Is this a great investment opportunity for long-term investors to consider? Let’s take a look.
Lots of potential
I hold Smith & Nephew shares in my own portfolio. Given that the company specialises in hip and knee replacement technology, I’ve always thought that it has bags of long-term investment potential due to the world’s ageing population.
It has been a very frustrating stock to own though. The coronavirus pandemic really hurt the company as many surgical procedures were postponed.
More recently, the company has been impacted by the weak economy in China as well as the country’s Volume-Based Procurement (VBP) programme – a government initiative aimed at lowering the cost of medical products. This has slowed overall growth as the group has significant exposure to the world’s second-largest economy.
Lower full-year guidance
This China exposure is one reason the shares just plummeted.
On Thursday, the company posted an update for Q3 with guidance for the full year. And unfortunately, it was a little disappointing.
As a result of the challenges in China, the company now expects full-year revenue growth of 4.5%. Previously, it was expecting growth of 5%-6%.
Given the lower level of top-line growth, the company expects its profit margins to swell at a slower rate than previously forecast. In August, Smith & Nephew advised that trading profit margin for 2024 would be at least 18%, however, it now expects growth of up to 50 basis points from last year’s figure of 17.5%.
A buying opportunity?
Is there a buying opportunity after the share price crash?
Potentially.
I don’t plan to buy any more shares myself as it’s already a decent-sized position in my portfolio.
But if I didn’t own any of the shares, I might be taking a closer look at the stock now.
Management continues to believe that the company is capable of generating substantial growth and profitability in the long run. “We remain convinced that our transformation to a higher growth company, with the ability to drive operating leverage through to the bottom line, is on the right course,” said CEO Deepak Nath in the Q3 update.
And the stock trades at a relatively attractive valuation today. Currently, the consensus earnings forecast for 2025 is $1.10 (it reports in US dollars). Let’s say that the group actually generates $1 in earnings instead next year. In this scenario, the price-to-earnings (P/E) ratio is only about 12.4 at today’s share price, which is quite low for a healthcare company.
Add in the fact that there’s a 3% dividend yield on offer now, and there’s a lot to like.
Of course, China remains a key risk here in the short term. For the company to do well, it needs the economy to pick up and volume benefits from the VBP programme to come through.
Taking a long-term view, however, I continue to believe this stock has the potential to generate attractive, FTSE-beating returns.
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