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The share price of FTSE 100 healthcare company Smith & Nephew (LSE: SN.) has popped today (5 August). As I write this, it’s up 14%.
While that’s a big gain, I reckon there’s more to come from this stock. Here’s why I reckon it’s just getting started.
This stock has been a dog
This Footsie stock has been weak for a few years now (I’d know because I hold it in my ISA). Up until a few months ago, it was trading around 50% below its pre-Covid highs.
This underperformance has been down to a few factors including a slower-than-expected recovery in orthopaedic surgery demand (Smith & Nephew specialises in joint replacement technology), issues in China, and tariff uncertainty.
However, the company has been making moves to improve its financial performance. And these moves appear to be paying off.
Brilliant H1 results
In its first-half results today, the company reported year-on-year revenue growth of a healthy 6.7%. Breaking this down, orthopaedics saw 5% growth, sports medicine and ENT delivered 5.7% growth, and advanced wound management registered 10.2% growth.
Profitability numbers were even better. Here, operating profit was up 30.6% year on year while operating profit margin climbed to 14.5% from 11.6%.
On the back of these results, the company raised its dividend by an inflation-beating 4%. It also announced a share buyback of $500m, which is quite significant given that the company’s market cap is only about £11.5bn.
“The operational improvements we have made under the 12-Point Plan are increasingly translating into better financial performance. There is more to be done, but the transformation of Smith & Nephew is starting to deliver substantial value.”
CEO Deepak Nath
More to come
Now, looking at the long-term set-up here, I see the potential for more gains from Smith & Nephew shares. Because this company is very well placed to benefit from changing global demographics.
By 2030, one in six people globally are expected to be 60 or older, according to the World Health Organisation (WHO). In the US (a huge market for Smith & Nephew), one in five people are expected to be over 65 by the same year.
This demographic shift is likely to significantly increase demand for orthopaedic surgeries and related technologies (our joints break down as we get older). So, the company looks very well positioned for long-term growth.
I also wouldn’t be surprised to see a takeover here. The valuation remains quite low for a medical technology business and I think this company could appeal to a range of larger healthcare organisations in the US.
Of course, there are no guarantees that the stock will continue to perform. US tariffs are a risk in the short term while new technologies like GLP-1 weight-loss drugs are a risk in the long run.
I like the set-up though. With the stock still well below its pre-Covid highs, I think it’s worth considering today.
