Broker snap: Smith & Nephew 'undervalued', UBS upgrades

27th Jan 2014 09:51

UBS has upgraded its recommendation for medical equipment maker Smith & Nephew from 'neutral' to 'buy', saying that even after significant outperformance the stock remains undervalued compared with others in the sector."Smith & Nephew trades at a 10% discount to peers despite a superior return on capital employed, and only marginally inferior growth," the bank said.UBS highlighted the group's potential in the orthopaedics markets, where a cyclical upturn - evident by continued momentum in the fourth quarter - should help near-term results, though growth is likely to ease over the long term."Whilst it seeks to maintain its position in orthopaedics in developed markets, it will use this business as a source of cash for investment both in emerging markets and other higher growth opportunities."Meanwhile, the Advanced Wound Bioactives unit of the Advanced Wound Management division could offer more upside than current consensus estimates suggest, UBS said. The bank said that Santyl - "the only significant gel based collagenase debridement product currently available" - will grow by 18% over the next three years.The target price for the stock has been hiked from 780p to 1,000p."A pick up in Santyl volumes or a more sustained pick up in developed-market orthopaedic volumes could drive significant upside."The stock was more or less flat at 883p on Monday morning.BC