“Smith & Nephew Sees Growth Potential Amid US Market Challenges”


New York, July 11, 2024 – Smith & Nephew PLC, a UK-based global medical technology company, is showing promising signs of recovery under CEO Deepak Nath’s turnaround strategy, despite ongoing operational challenges in the US market. According to a recent Morningstar Equity Analyst Report, the company’s stock (SNN) is currently trading at $28.22, with a fair value estimate of $38.00, indicating significant undervaluation.

Smith & Nephew has seen positive developments, particularly outside the United States. The company’s orthopedic, sports medicine, and arthroscopy businesses have been regaining their footing, contributing to a 6% revenue growth in the fourth quarter of 2023. The sports medicine and advanced wound management sectors have been key drivers of this growth.

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However, the US market remains a challenging environment for Smith & Nephew. Issues such as low inventory levels of certain items and turnover in the commercial organization have been persistent hurdles. The company has been addressing these issues by filling most vacancies, which is expected to improve productivity by early 2025.

Despite being smaller than dominant competitors like Stryker and Zimmer Biomet, Smith & Nephew has managed to carve out a niche in the orthopedic, sports medicine, and wound care markets through impressive innovations. Notable technologies include the Oxinium hip implants and the Regeneten implant for tendon growth. The firm’s hand-held Cori orthopedic robot is well-suited to outpatient settings, leveraging Smith & Nephew’s strong presence in ambulatory surgical centers (ASCs).

The company’s market share remains about 11% in the hips and knees segment. Though this is a modest share, the high switching costs for orthopedic surgeons provide a protective moat, making it difficult for competitors to erode Smith & Nephew’s position.

Smith & Nephew’s financial health appears robust with a market capitalization of $12.05 billion as of July 9, 2024. The company’s EBITDA margin is projected to increase from 6.5% in 2020 to 16% by 2027. Revenue growth is expected to continue at a mid-single-digit pace in the sports medicine and orthopedic franchises, supported by the ongoing resumption of regular procedure volumes and launches of new products.

The company is also making strides in environmental, social, and governance aspects, with a medium risk rating. Product governance remains the firm’s greatest ESG challenge, given the potential for defective products and recalls. However, Smith & Nephew’s strong relationships with orthopedic surgeons and extensive patent portfolio help mitigate these risks.

While Smith & Nephew faces near-term headwinds, particularly in the US market and from China’s Volume-Based Procurement program, the company’s strategic innovations and operational improvements offer a path to sustained growth. The market’s positive reaction to recent developments indicates confidence in Smith & Nephew’s ability to navigate these challenges and capitalize on its innovations.

Smith & Nephew continues to be a significant player in the global medical technology market, with the potential to achieve greater efficiency and profitability in the coming years. Investors may find the current undervaluation an attractive entry point, given the company’s strategic direction and operational improvements under CEO Deepak Nath.