Smith & Nephew PLC (NYSE:SNN): A Value Investment in Medical Devices

Medical device manufacturer Smith & Nephew PLC - Spon ADR (NYSE:SNN) is an interesting option for investors using a value investing method. The company was found using a systematic screening method that focuses on stocks with good fundamental valuation numbers while also having acceptable results in profitability, financial condition, and growth. This system fits with main value investing ideas, where investors look for companies priced lower than their inherent worth but also showing sound operational basics.

Valuation Metrics

The company's valuation profile is notable, receiving a ChartMill Valuation Rating of 7 out of 10. While the typical Price/Earnings ratio seems high at 28.69, other valuation numbers show a different situation:

• Forward P/E ratio of 12.03 indicates acceptable earnings projections
• Enterprise Value to EBITDA makes SNN less expensive than 89% of similar companies
• Price/Free Cash Flow ratio is better than 91% of firms in the health care equipment field
• Compared to the S&P 500's forward P/E of 36.59, SNN seems notably inexpensive

These valuation features are important for value investors looking for a margin of safety, the difference between market price and estimated inherent value that Benjamin Graham highlighted as basic to risk management.

Financial Health Assessment

Smith & Nephew holds a fair financial condition rating of 5, with several good points offset by some issues:

• Current ratio of 3.00 shows good short-term liquidity
• Altman-Z score of 3.45 points to low bankruptcy danger
• Debt to free cash flow ratio of 4.33 years is acceptable
• Some worry comes from rising debt/asset ratios and a Debt to Equity ratio that is worse than 63% of similar companies

For value investors, financial condition offers important protection against the value trap situation where seemingly inexpensive stocks keep falling because of basic financial problems.

Profitability Profile

The company does well in profitability with a rating of 8, performing better than most rivals in several important areas:

• Return on Invested Capital of 8.43% is higher than 86% of similar companies
• Operating margin of 14.99% is in the top group for the field
• Profit margin of 8.26% is more than 81% of competitors
• Steady positive earnings and operating cash flow over five years

Good profitability is necessary for value investments because it supports the idea that short-term market undervaluation will eventually adjust as the company's basic earnings capability becomes acknowledged.

Growth Trajectory

With a growth rating of 5, Smith & Nephew displays encouraging speeding up patterns:

• Recent EPS growth of 59.86% over the last year
• Estimated EPS growth of 11.19% each year in future years
• Revenue growth speeding up from past 2.49% to forecasted 5.46%
• Good change in both EPS and revenue growth rates

For value investors, growth supplies the trigger that can reduce the difference between current market price and inherent value, making the undervaluation idea practical.

Investment Considerations

The mix of appealing valuation multiples, good profitability, and speeding up growth makes Smith & Nephew worth looking at for value-focused portfolios. The company's place in the medical device field provides some defensive qualities, while its global presence in orthopedics, sports medicine, and wound care gives varied income sources. The 2.33% dividend yield, while not outstanding, adds another return element while investors wait for possible valuation multiple improvement.

Investors looking for comparable options can find more outcomes using our Decent Value Stocks screening tool, which methodically finds companies with good valuation features along with acceptable fundamental scores.

For a full fundamental review of Smith & Nephew, including complete ratio study and competitor comparisons, see the full fundamental report.

Disclaimer: This analysis is for informational purposes only and does not constitute investment advice, recommendation, or endorsement of any security. Investors should conduct their own research and consult with a qualified financial advisor before making investment decisions. Past performance is not indicative of future results.