Shares in Smith & Nephew PLC (LSE:SN) fell 2% after UBS downgraded stock in the med-tech firm to 'neutral' from 'buy' on valuation grounds. The price target remains at £12.50.
The downgrade reflects concerns over limited near-term earnings momentum. UBS is now 2% below consensus earnings estimates for 2025, even factoring in a strong second half of the year.
The stock has risen 25% over the past year and now trades in line with its historic average valuation versus the sector. The discount to peers, once a key attraction, has narrowed.
UBS also sees risks in Smith & Nephew’s reliance on a strong performance in the second half of 2025. Forecasts assume a record jump in profit margins, which UBS says is feasible but not without risk.
The orthopaedics division, which makes hip and knee replacements, remains a challenge. Smith & Nephew has struggled to gain market share in the US, and UBS expects this to continue.
The company is aiming for 5% organic revenue growth this year, but UBS is cautious. While new product launches could help, the firm faces pricing pressure in China and economic uncertainty in key markets.
UBS has cut its revenue forecasts for 2025-2029 by 1%, leading to a 1-3% reduction in adjusted profit expectations and a 4-5% cut to earnings per share estimates.
Despite lowering earnings forecasts, UBS has increased its cash conversion assumptions, citing a stronger-than-expected 2024 and lower restructuring costs in 2025.
A potential upside for the stock could come from a turnaround in the orthopaedics division. Every 0.5% improvement in US orthopaedics growth would add 1.5% to forecast profits.
There is also room for costs to be lower than expected. UBS estimates 3-4% cost inflation but notes that some peers have reported easing raw material prices.
A strategic review could unlock further value. UBS calculates that a break-up of the business could imply a valuation of £16 per share. However, management has ruled this out until orthopaedics shows clear improvement.
For now, UBS sees better opportunities elsewhere and believes it is time to take a “pause for breath” on Smith & Nephew.
In late morning trading, the stock was off 25p at 1,116p.