Should investors buy Smith & Nephew shares today?

Smith & Nephew (LSE: SN.) Shares have taken a big hit over the past few years. Before Covid, shares in the orthopedic company were trading around £20. But today, they can be bought for around £12.

Is this a good buying opportunity for long-term investors? Let’s have a look.

Did the stock price go down

Smith & Nephew has certainly faced similar challenges in recent years. During the Covid pandemic, many elective surgeries have been postponed. This has a huge impact on the company’s sales.

The company is also facing supply chain issues. In recent years, hip and knee implants have become an unwanted victim of a shortage of raw materials.

On top of this, Smith & Nephew had to deal with inflationary pressures. Margins have been hit by higher commodity costs and wages.

Finally, growth is also affected by currency issues, as companies report in US dollars.

Overall, the operating environment has been very challenging.

Improves insight

Now it looks like Smith & Nephew is starting to turn a corner.

In a recent trading update, the healthcare company advised that for 2023, it expects revenue growth of 5-6%, above the level of 4.7% reported for 2022.

It also said it expects medium-term trading profits to grow by at least 20% in 2025, up from 17.3% in 2022, due to increased productivity.

We look forward to delivering faster profitability and margin expansion in the coming year, and laying a solid foundation for our medium-term ambitions as we transform into a growing company.

Smith & Nephew CEO Deepak Nath

This is all very encouraging.

Looking further, the outlook for the company remains attractive, in my mind.

This is a business that is well-placed to benefit from the world’s aging population. The number of over 65s worldwide should drive demand for orthopedic products.

According to Precedence Research, the market for knee implants is expected to grow by around 6% per year between now and 2030.

Evaluation

As for the share price, it is relatively attractive now, to my mind.

Currently, analysts expect Smith & Nephew to generate earnings per share of 85.3 cents for 2023. That puts the stock at an expected price-to-earnings (P/E) ratio of around 17.

It is now several times higher than the average of the FTSE 100. However, it is lower than its US-listed competitors Stryker, which currently has a P/E ratio of about 26.

At the current valuation, I think there is potential for multiple appreciations if the company can demonstrate its business performance is improving and its transformation plan is working.

Interesting risk/reward

Of course, there are risks here. In the company’s new results, it noted that it will continue to face macroeconomic problems in 2023.

It is worth noting that Smith & Nephew has not increased its dividend for 2022. This suggests that management is a bit cautious about the future.

But overall, I like the current risk/reward proposition. At the current share price, I view the stock as a buy.