Tentative signs of sustainable margin improvement and market share gains, combined with the tailwind provided by continued recovery in elective procedures, should provide medical products company Smith & Nephew (SN.) with positive momentum heading into 2024.

The shares are trading close to 10-year lows, and from a valuation perspective have rarely offered better value relative to the UK market and the firm’s US and European peers than they do currently.

Analysts at Berenberg estimate the shares are trading on a 2023 PE (price to earnings) ratio of 15 times, which looks stingy compared with three-year expected earnings per share growth of 16% per year.

Also, sentiment should get a boost from the appointment of new chief financial officer John Rogers, the former CFO of advertising group WPP (WPP), who has extensive experience in business transformations and capital markets.

We believe the current depressed valuation offers a buying opportunity which should be rewarded as better operational performance is delivered.

In the medium-term, the firm is targeting more than 5% underlying annual revenue growth and a trading profit margin of over 20%, which would bring it closer to its global peers.

At the beginning of November, the firm raised its full-year sales growth guidance to the top end of the range of 6% and 7% which is encouraging.

At an investor event at the end of November, chief executive Deepak Nath said the company had completed 65% of its 12-point plan (to improve operational performance) compared with 45% at the half-year mark meaning investors should start to see tangible evidence of progress.

One example cited by Berenberg is an improvement in commercial delivery in Orthopaedics (hip and knee transplants) which is leading to market share gains.

There is concern in some quarters that the widespread adoption of weight-loss drugs could reduce the demand for knee and hip replacements, as being overweight is a contributing cause of joint wear.

The chief executive believes the opposite is true. ‘As patients presumably benefit from GLP-1, (a class of weight-loss drugs), you could actually see some of these patients who are previously ineligible for joint replacement become eligible for that surgery,’ observed Nath.

The current senior management team appears to be gaining traction and delivering tangible financial benefits, and Shares thinks the risk of the firm not delivering on the turnaround are already factored into the low valuation.

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