Morningstar analysts have raised their valuation of Smith & Nephew (SN.) shares following respectable set of fourth-quarter results this week, showing the firm continues to make progress in improving profitability. However, trading at 1,174p at the time of writing, shares in the medical devices manufacturer continue to be overvalued by the market compared to our increased fair value estimate of 905 pence per share, or $28 for the ADRs.
Below is a synopsis from Morningstar analyst Debbie Wang's report on S&N.
Bulls Say
Smith & Nephew participates in the fast-growing sports medicine arena thanks to its extensive arthroscopy portfolio.
Smith & Nephew has successfully enlarged the orthopaedic patient pool by offering products for hip resurfacing and knee implants with new materials technology intended to last beyond the typical life span for knee replacements.
Smith & Nephew has been building out its presence in emerging markets. Considering the obstacles in developed markets that keep the firm from transforming into a top-tier player, Smith & Nephew may enjoy greater upside in developing markets.
Bears Say
Its mid-tier position among orthopaedic implant makers leaves Smith & Nephew vulnerable to being shut out as device formularies become more popular over the long term.
Despite Smith & Nephew's ongoing investments in infrastructure in the emerging markets, it could be a long time before business from that geography grows large enough to materially affect the company's total top line.
Ongoing austerity measures in Europe could damp Smith & Nephew's orthopaedic business through the near term.
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