Is Now the Time to Buy Smith & Nephew?
LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today, I am looking at Smith & Nephew to determine whether you should consider buying the shares at 660p.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
Yield: Does the share provide a solid income for investors?
Dividend Cover: Is the dividend sustainable?
So, let's look at the numbers:
Stock | Price | 3-yr EPS growth | Projected P/E | PEG | Yield | 3-Year dividend growth | Dividend cover |
|---|---|---|---|---|---|---|---|
Smith & Nephew | 660 pence | 14% | 13.5 | 4.5 | 2% | 21% | 2.9 |
The consensus analyst estimate for this year's earnings per share is $0.76 (3% growth) and dividend per share is $0.26 (50% growth).
Trading on a projected P/E of 13.5, Smith & Nephew appears slightly cheaper than its peers in the Health Care Equipment & Services sector, which are currently trading on an average P/E of 14. Smith & Nephew's P/E and low single-digit growth rate give a PEG ratio of 4.5, which implies the share price is significantly overpriced for the near-term earnings growth the company is expected to produce.
Offering a 2% yield, the dividend is slightly above average for the sector, which is currently 1.9%. Smith & Nephew has a three-year compounded dividend growth rate of 21%, implying the payout could continue to outperform the company's peers.
Indeed, the dividend is nearly three times covered, giving Smith & Nephew plenty room for further payout growth.
Strong cash flow, in particularly during the last reported quarter, has helped pull the company from net debt of $200 million to net cash of $380 million since the start of the year. I believe the strong cash performance has spurred analysts to predict 50% growth in the dividend this year.
Slow growth but a strong cash flow
In my opinion, the health care sector is fairly immune to the poor economic climate. However, prolonged economic headwinds are taking their toll on Smith & Nephew.
In the year to September, Smith & Nephew saw revenues fall by almost 8%. Interestingly, however, underlying profits were up 1% during the period following an improvement to profit margins.
The results revealed mixed divisional performances. The group's "advanced wound-care management" products saw revenues decline 20% within Spain, though sales within the U.S. and emerging markets experienced 11% and 15% gains, respectively. Meanwhile, "advanced surgical devices" growth was flat within developed markets but saw 20% growth in China.
Trading profit was $149 million for the third quarter, producing a profit margin of approximately 21%. I believe this was an improvement from last year, when the margin was nearly 18%. This improvement, in my opinion, was down to group restructuring
Overall, Smith & Nephew is experiencing declining revenues; however, group restructuring is improving profits and the current valuation multiple does not look too onerous. So I believe now looks to be a good time to buy Smith & Nephew at 660 pence.
More FTSE opportunities
As well as Smith & Nephew, I am also positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.
The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.
In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
The article Is Now the Time to Buy Smith & Nephew? originally appeared on Fool.com.
Rupert Hargreaves and The Motley Fool have no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
