Smith & Nephew, a medical technology company listed on the FTSE 100, has seen its share price drop 14% since September 2025, despite strong 2025 results. This article explores whether this presents an opportunity to buy into a potentially undervalued business with strong growth prospects.
A Strong Performance
Smith & Nephew's 2025 results were impressive, with a 15.5% jump in trading profit to $1.2bn, a 160 basis point increase in trading margin to 19.7%, and a 6.1% revenue growth to $6.16bn. These numbers represent the company's strongest profitability in a decade, with supply issues resolved, productivity improved, and the portfolio rationalised. The Orthopaedics division returned to growth, supported by improved logistics and the adoption of the CORI robotics platform. Sports Medicine & ENT continued to outperform, with double-digit growth in joint repair and strong uptake of REGENETEN and newer implants.
The Path Forward
Management's expectations are optimistic, with a projected 12-13% return on invested capital and a 9-10% trading profit compound annual growth rate by 2028. This suggests a business with rising efficiency, expanding margins, and a clear pathway to sustained value creation. The company's strong performance and positive momentum are well-supported by its recent results, indicating a credible multi-year turnaround.
Undervaluation and Investment Potential
To assess Smith & Nephew's true worth, I conducted a discounted cash flow (DCF) analysis, using a discount rate of 8.6% and a perpetual growth rate of 3.2%. This analysis suggests that the company's shares are 28% undervalued at their current price of £12.46, implying a fair value of £17.31. This undervaluation could present a buying opportunity, as asset prices often trade towards their fair value in the long run.
Personal Perspective
While Smith & Nephew's yield of 2.3% may not appeal to high-yield stock investors, it offers a business with improving profitability, rising cash generation, and a credible multi-year turnaround. The company's strong performance and positive momentum make it an attractive investment opportunity for those seeking a business with strong growth prospects and a credible turnaround strategy.
