Smith & Nephew PLC (LON:SN.) was upgraded by Morgan Stanley as analysts expect orthopaedic and sports medicine will enjoy one of the fastest recoveries from coronavirus lockdown in the second half of the year and in 2021.
The FTSE 100 company said last month that revenue in April plunged 47% as most of its markets have stopped non-emergency surgery amid the coronavirus pandemic.
The MS rating on the shares was lifted to 'overweight' from 'equal-weight' as the healthcare analysts said they believe the “fundamentals of the business are less challenged” compared to other parts of the wider sector.
Smith & Nephew shares have underperformed the European medical technology sector by 5% since the COVID-19 outbreak, driven by significant declines since March in elective surgeries following hospital actions to delay procedures to free up capacity for patients with the virus.
“With April likely the trough in revenues, the debate for the stock has now shifted to what the shape of its recovery could be and what are the mid-term implications.”
Having checked with doctors, hospitals and manufacturers, the analysts said elective orthopaedic procedures are beginning to return across the globe following the April trough at around 20-30% of normal levels, which they feel has improved above 40% in May.
Orthopaedics and sports medicine are expected to see a recovery in one to two quarters, based on the view that procedures have been delayed rather than cancelled, leading to a build-up on waiting lists and further pentup demand, as well as financial incentives for providers and surgeons to resume activity and prioritise these higher-margin procedures.
There should also be “adequate supply” as surgeons are expected to be willing to work overtime to recover delayed surgeries, with support from governments to clear the backlog and reduce waiting lists.
Based on the resulting forecasts for the year to end with volumes close to flat year-on-year, the analysts see the shares as currently trading at 12 times a five-year average one-year forward multiple, compared to 13.5 times for close rivals.
A price target of 1,950p, trimmed from 1,990p, offers upside to the last close price of just below 1,700p.