Smith & Nephew PLC (LON:SN.) was the top blue chip riser on Thursday morning after JP Morgan upgraded the artificial hip and knee maker to ‘overweight’ and hiked its target price to £14.11.
Shares in the FTSE 100 company gained 4.1% to £12.93 shortly before 11am in London.
READ: S&N upgrades guidance following recent tax changes
Analysts at the US investment bank reckon there are a couple of catalysts on the horizon that make the recent share price fall – down 14% since the end of October – a “compelling entry point”.
“With a relatively unlevered balance sheet (0.6x EBITDA) giving flexibility (most likely M&A, but possibly a share buyback), a new cost savings programme (to be announced at FY results) and a new CEO TBC, we see the valuation as attractive, coupled with catalysts,” wrote analyst David Adlington.
On Tuesday, Smith & Nephew said the tax reforms recently brought in by Donald Trump would see its effective tax rate lowered to 20-21%, down from 25% previously.
“While we had expected a tailwind from US tax reform, the announcement that the group tax rate will fall to 20-21% from 25% going forwards was better than we had expected,” Adlington noted.
That alone has forced the analyst to up his earnings per share forecasts by 5.3-6.7% over the next few years.
JP Morgan is looking for earnings per share of US$0.89 in 2017 and US$1.00 in 2018, up from US$0.87 and US$0.90 previously.
The recent weakening of the US dollar is also good news for S&N which reports its results in the greenback.
READ: Smith & Nephew says full year growth to be at lower end of guidance range
That’s because the revenues it generates in the UK and Europe, for example, become worth more when translated into dollars. Adlington said the FX tailwinds add another 4% his revenue forecasts.
He now expects revenues of US$4.77bn in 2017 – unchanged from his last forecast – and US$5.15bn in 2018 (previously US$4.97bn).
Adlington concludes: “The valuation in itself is not necessarily enough for an OW rating. However, a new cost savings programme at the FY results is likely to drive some margin expansion, although we are mindful that this could be captured in consensus.”