Are Smith & Nephew shares about to explode?

I have Smith & Nephew (LSE:SN) shares in my SIPP, and I’m embarrassed to say, I haven’t given the stock too much attention recently.

However, I was taking a deeper look last week, and I decided I should give the stock greater consideration.

After all, the share price is trading lower today than it was during the pandemic — when there was less need for Smith & Nephew’s medical devices and notably its hip replacements.

Moreover, performance is picking up, with the board now expecting full-year underlying revenue growth of 6%-7%.

As such, it should be no surprise that out of the 15 analysts covering the stock, there’s only one ‘underperform’ (that is, sell) rating.

With seven ‘buy’ ratings, two ‘outperforms’, five ‘hold’ ratings, and that one ‘underperform’, Smith & Nephew has an average price target of £14.13. That’s 50.3% above the current share price.

A rally really could be on the cards.

Undervalued

We can employ metrics such as the price-to-earnings (P/E) ratio and the enterprise value-to-EBITDA (EV/EBITDA) ratio as valuable tools to assess whether a stock is reasonably priced or undervalued.

These metrics enable us to gauge the relationship between a company’s stock price and its financial performance, helping us make informed investment decisions.

So, here’s how Smith & Nephew matches up against two giants of the sector, Johnson & Johnson and Medtronic.

As we can see from the below, Smith & Nephew appears cheaper than it peers according to the vast majority of metrics.

Near-term investment thesis

It’s great that Smith & Nephew is cheaper than its peers, but what’s the growth story?

Well, in 2022, the firm announced its ’12-Point Plan’ to fundamentally change the way it operates.

This will see the business fix the foundations of its Orthopaedics division and increase productivity while accelerating growth in the Advanced Wound Management and Sports Medicine & ENT business units.

These are big business changes, but investors are now waiting for tangible evidence that the transformation plan is working. This may take time.

If Smith & Nephew can do this, and given its depressed valuation, the stock looks very attractive to me.

And the long term…

The long-term investment thesis for Smith & Nephew strongly corresponds with the following prevailing trend.

As global populations continue to age, coupled with an extensive backlog of elective surgical procedures in the West following Covid-19, the outlook for the company’s orthopaedic products and wound care solutions appears exceedingly promising.

The increasing demand within these segments is poised to drive substantial growth in the years ahead. This demographic shift and the growing need for healthcare solutions underline the potential for Smith & Nephew to capitalise on these enduring trends.

There’s some concern, as denoted by the 11.5% fall in the share price in September, that new weight-loss drugs (such as Novo Nordisk’s Wegovy) will reduce demand for hip replacements — Smith & Nephew’s forte — over the long run.

However, I think this may be overplayed. One in six over-60s are expected to be overweight by 2030.