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On Wednesday, UBS analyst Graham Doyle downgraded Smith & Nephew PLC (SN:LN) (NYSE: SNN) from Buy to Neutral, adjusting the price target to GBP1.25. The revision follows a period of positive sentiment that began in June 2024 when UBS turned optimistic about the company’s prospects. At the time, the consensus estimates appeared achievable, and the stock’s valuation, trading at a discount to the sector’s historical price-to-earnings ratio, seemed attractive for entry.
Smith & Nephew’s stock has since experienced a significant re-rating, surging approximately 25%, which now places it in line with its historical average valuation compared to the sector. Doyle noted that while a sum-of-the-parts (SOTP) valuation still suggests potential upside, the absence of imminent portfolio changes and a forecast that hinges on a stronger second half of 2025 warrant a more cautious outlook.
The UBS analyst also indicated that the firm’s adjusted earnings per share (EPS) estimates for 2025 through 2029 are now 3-7% below the consensus. This adjustment, combined with the recent stock performance, has led to the decision to downgrade the rating. The company maintains strong fundamentals with a healthy current ratio of 2.89 and revenue growth of 4.7% in the last twelve months, earning a "GOOD" overall financial health score from InvestingPro.
The downgrade reflects UBS’s stance that, despite Smith & Nephew’s potential, current market conditions and company setup do not favor immediate growth. Doyle’s comments suggest a period of consolidation might be ahead for the company’s shares as they have already seen substantial gains in recent times.
In conclusion, UBS’s new neutral position on Smith & Nephew is based on a comprehensive analysis of the company’s valuation, projected earnings, and the timing of potential growth. The firm’s analysts will likely continue to monitor the stock for any changes that could impact its investment thesis.
In other recent news, Smith+Nephew reported strong financial results for 2024, with revenue reaching $5,810 million, up from $5,549 million in 2023, marking an underlying revenue growth of 5.3%. The company’s trading profit increased by 8.2% to $1,049 million, and the trading profit margin rose to 18.1%. The fourth quarter alone saw revenue of $1,571 million, reflecting an 8.3% underlying revenue growth. Smith+Nephew anticipates continued revenue growth and margin expansion for 2025, projecting an underlying revenue growth of around 5% and a trading profit margin between 19.0% and 20.0%. Additionally, Smith+Nephew has appointed Sybella Stanley as an independent Non-Executive Director, effective February 1, 2025. Stanley will join the Remuneration Committee and is expected to become its Chair by June 30, 2025. Her extensive experience in global businesses is anticipated to strengthen the company’s board. These developments are part of Smith+Nephew’s ongoing strategic initiatives to enhance its operational and financial performance.
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