Down 50%, this could be the FTSE 100’s best value stock

There are many value stocks in the FTSE 100 right now. From banks to miners, a lot of shares are dirt cheap.

There’s one in particular that stands out to me, however. I reckon it’s probably the best value play in the Footsie at the moment.

A high-quality company

The stock I’m talking about is Smith & Nephew (LSE: SN.). It’s a healthcare company that specialises in joint replacement technology.

From an investment perspective, there’s a lot to like about this company.

For a start, it has an excellent long-term track record when it comes to generating wealth for shareholders. Believe it or not, the company has paid a dividend every single year since 1937 (the dividend yield is around 3% currently).

Meanwhile, looking ahead, it has attractive long-term growth prospects. That’s because the world’s ageing population is likely to result in more joint replacement surgeries (the joint replacement market is projected to grow by around 8% per year between now and 2030).

Big share price fall

However, in the last few years, Smith & Nephew’s share price has taken a huge hit. The hit has been so significant (roughly 50%) that the shares were recently near 10-year lows.

There are a few reasons the shares have fallen.

One is that the company has faced a lot of challenges due to Covid (many elective surgeries were postponed).

Another is that there have been concerns that GLP-1 weight-loss drugs will reduce the number of joint replacement surgeries in the future.

Investment opportunity

Now, I think this share price fall has created a huge investment opportunity.

Earlier this month, Smith & Nephew posted a trading update. And the numbers were strong.

For Q3, revenue was up 7.7% year on year to $1,357m.

And for 2023, the company said it was expecting growth to be at the high end of its 6-7% guidance.

Overall, I am encouraged that our actions to transform Smith & Nephew to a consistently higher growth company are starting to deliver,” commented CEO Deepak Nath.

These numbers suggest the coronavirus-related slowdown could be over.

As for the weight-loss drugs concerns, these do add some uncertainty. However, I reckon the fears are overblown.

And a lot of City analysts have the same view.

For example, analysts at JP Morgan – who just upgraded the stock to ‘overweight’ (buy) from ‘neutral’ (hold) – noted that they believe the potential GLP-1 impact has been overplayed.

It’s worth pointing out here that Deepak Nath said last week that weight-loss drugs could actually help previously ineligible overweight patients get approval for joint replacement surgery.

So, I don’t think investors should be too worried about this issue.

Low valuation

After the recent share price fall, Smith & Nephew’s forward-looking price-to-earnings (P/E) ratio is about 12.

That’s a low valuation for a high-quality company like this.

To my mind, a P/E ratio of about 15-16 is probably warranted here.

That would imply possible share price gains of around 25-33% in the medium term.

That’s roughly in line with JP Morgan’s price target. Its target for the healthcare stock is 1,248p at present – about 26% higher than the current share price.

Of course, there’s no guarantee that the shares will re-rate to a higher valuation.

However, I reckon there’s a good chance they will rise from here, especially after the company’s recent trading update, which was very positive.

The post Down 50%, this could be the FTSE 100’s best value stock appeared first on The Motley Fool UK.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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Edward Sheldon has positions in Smith & Nephew Plc. The Motley Fool UK has recommended Smith & Nephew Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

(The post is shared from syndication feed, it is not edited by Analyzing Market Team.)