Upside limited at Smith & Nephew, says Morgan Stanley

15th Aug 2014 10:51

Shares in Smith & Nephew were under pressure on Friday after analysts at Morgan Stanley downgraded the medical devices maker from 'overweight' to 'equal weight' following a recent strong run in the stock.The share price has risen by over 20% since the start of 2014, which Morgan Stanley says was partly driven by speculation surrounding a potential takeover.The bank said the stock is now trading at a 10-year high relative to others in the orthopaedic sector and that the "valuation is less appealing and driven by M&A".Smith & Nephew's shares have advanced strongly since May when it was reported that US peer Stryker (SYK) was considering a bid for the company. While SYK had confirmed the rumours, it was forced to pull out of the running due to UK Takeover Panel rules.Nevertheless, Morgan Stanley said that SYK could make an offer once the six-month cooling off period expires in November. "Given the business overlap, we believe SYK would be able to achieve a number of synergies should a deal occur," the bank said, estimating a hypothetical valuation of around 1,065p and 1,350p in a potential bid.However, it added: "Whether SYK makes an offer for SN remains uncertain, but given the six months rule under UK Takeover Code, we see it as unlikely that this could happen before late Nov 2014. If there is no offer from SYK, SN could start to lose its M&A premium of around 10%."The target price for the stock has been lifted from 980p to 1,026p.BC