M&A speculation to support Smith & Nephew shares, says JPMorgan

4th Jun 2014 10:09

Shares in Smith & Nephew (S&N) were making gains on Wednesday after JPMorgan Cazenove said that M&A speculation could provide support to the stock in the near term after its recent strong performance.JPMorgan, which labelled medical device maker as 'neutral', pointed out that the shares have risen by 19% so far this year, the second-best performer in the European medtech sector."We believe around half this performance reflects the value accretion from the ArthroCare deal, and around half from commentary on sector consolidation."As for ArthroCare, the medical device group with a sports medicine portfolio that S&N bought for $1.5bn in 2013, JPMorgan said that it has now incorporated the business into its forecasts after the deal closed last week. It said that the synergies look "attractive" and estimates a rate of earnings per share accretion of 6-8%.The bank recently spoke to S&N's Chief Financial Officer Julie Brown about the recent consolidation in the sector, particularly the proposed the merger between US rivals Zimmer and Biomet. While Brown admitted that the deal came "as a surprise", she sees an "opportunity to gain share driven by the disruption".JPMorgan said: "Management continues to execute against their stated strategy. The year-to-date strength in the shares means the upside from ArthroCare is now well reflected in our view. "[...] Stryker's comments are likely to leave continuing risk-arbitrage interest in the name which we think should provide some support over the next three-six months."Nevertheless, the bank set a 908p target price for the stock, representing potential downside from Wednesday's share price of 1,051p, up 2% on the day.BC