r/valueinvesting
Smith & Nephew (SNN)?
Author considers buying SNN for its attractive valuation, improving FCF, and shareholder returns, despite margin and tariff concerns.
- Attractive valuation with ~13x forward P/E, ~15x P/FCF, and a 7% FCF yield.
- Strong shareholder returns via a 2.6% dividend and a new £400m+ buyback program.
- Operational improvements including FCF growth to £635m, deleveraging to 1.7x EBITDA, and activist backing from Cevian.
- Profitability lags peers with a 16% operating margin and lower ROCE compared to other medtech companies.
- Exposure to risks from Chinese mass-manufacturing and a projected $60M tariff cost in 2026.
I’ve been looking into Smith & Nephew recently and am considering starting a position at around the current price (\~1113p).
A few things stand out to me. The share price is still well below where it was in 2021, yet the valuation doesn’t look demanding. Forward P/E is around 13x, Price/FCF is roughly 15x, and FCF yield is close to 7%.
They also seem pretty shareholder friendly at the moment. There’s the dividend (about 2.6%) and the new £400m+ buyback, which together adds up to a decent level of capital being returned.
Operationally, things appear to be improving as well. Free cash flow has gone from around £400m to £635m over the last couple of years, margins are moving in the right direction, and leverage has fallen from 3.2x to 1.7x EBITDA.
Management’s new RISE strategy is aiming for 6-7% annual revenue growth and ROIC of 12-13% by 2028, which seems achievable if execution remains solid.
I also noticed that Cevian recently increased its stake to over 12%, which I see as a positive sign.
My main concern is profitability. ROCE still trails a lot of other medtech companies, and operating margins are around 16% compared with roughly 20-25% for many peers. Chinese mass-manufacturing is a risk and there is a $60M tariff cost in 2026.
Am I missing anything obvious here? Is this a value opportunity that’s been overlooked, or is there a good reason the market still isn’t giving it a higher rating?
Pretty large gap between Adjusted and GAAP/IFRS EPS.. Didn't see anything that stood out in their adjustments (though not a tonne of info was provided). I didn't dig up all the adjusted figures, as I'm hopping back and forth between computer and deadlifts, but statutory eps has been significantly under estimated for 8 of the last 11 yrs, according to the data service I use. Maybe adjusted met estimates all of those yrs? But if so, even that would make me wonder what's with all the significant upwards adjustments. Have you looked at what the story is there?
Indeed - noticed this. They’ve been using an ‘adjusted’ version that assumes restructuring is temporary, and intangible amortisation is irrelevant- for over a decade! And neither have been proven true.
But this is the reason I use FCF - cuts through all this manufactured noise. If you use FCF in your calculations instead, the case for buying is still good.
What data service do you use btw, if you don’t mind me asking?
alright, so now you made me curious, and I went and dug up EPS-A back to 2020. Looks like analysts have been pretty darn accurate up till now, so maybe those climbing projections into 2028 are a little more trustworthy.. Now I'm thinking I might wanna look at these guys a bit more.
note that w EPS-A included, the legend changes, orange no longer FCF
oh, I should have added, scale on left is share price (earnings / fcf on right), but since LSE trades in pence, it looks ridiculous, and the forward pe display on the left is off by a factor of 100. 😄
Ya, I've seen that w a few companies I've investigated (the never-ending restructuring to pad adjusted eps). I'm still not sure how I feel about fcf. Definitely don't love it on it's own (for example, under IFRS (non-US alternative to GAAP), Interest Paid can be an Operating Cashflow or a Financing Cashflow, so on it's own you don't know if FCF is pre or post interest.. checked your SN just now, they have it in operating, so fcf is after paying interest).
I user tickerdata (paid extension for Sheets, but it's cheap) in combination w googlefinance requests for historical prices. I like things like this to get a real quick idea of if I wanna investigate further. Incidentally, this graph will put in Adjusted EPs as well, but as it's not a reported metric, I have to manually fetch each datapoint (once, to a data sheet, then sheet will match ticker and year w xlookup whenever you ask for it again). Have not done so for sn yet