Kepler Cheuvreux has downgraded Smith & Nephew to a "hold" recommendation from "buy," and lowered its target price to GBp 1,230 from GBp 1,462. The broker said the shares face continued pressure due to a lack of near-term positive catalysts and an outstanding gap on top-line growth relative to company targets.
Smith & Nephew’s stock has fallen 10.5% year-to-date and trades inside a 52-week range of GBp 1,067 to GBp 1,435. The company carries a market capitalisation of GBP 9.6 billion.
Guidance and growth outlook
Kepler Cheuvreux flagged the company's goal of roughly 6% organic revenue growth for 2026 as "demanding" after Smith & Nephew reported first-quarter organic growth of 3.1%. Using its scenario analysis, the brokerage placed a central outcome closer to 5.1%.
In response to that view, Kepler Cheuvreux lowered its 2026 revenue growth forecast for the underlying business to 5.1% from 5.5%. It also reduced adjusted EBIT estimates by 4.7% for 2026 and 2.4% for 2027, and trimmed adjusted earnings per share forecasts by 10.9% for 2026 and 8.2% for 2027.
U.S. market challenges
The broker highlighted two unresolved U.S. headwinds. First, the outlook for skin substitutes is unclear in the wake of a reimbursement reset. Second, U.S. knee implant sales declined 10.3% in the first quarter, a notable underperformance versus peers that recorded growth of about 5% to 6%.
"We are therefore less concerned on margin delivery than on the top-line bridge," Kepler Cheuvreux said, noting FY25 trading margin improved 160 basis points to 19.7% under the 12-Point Plan.
Financial projections and valuation metrics
For fiscal 2026, Kepler Cheuvreux forecasts Smith & Nephew sales of $6.57 billion, EBITDA of $1.66 billion and EBIT of $1.03 billion. Adjusted net profit is seen at $721 million, with earnings per share of $0.83 and free cash flow of $777 million. Net financial debt is projected at $2.91 billion for 2026.
Looking further ahead, the brokerage expects 2028 sales of $7.35 billion, EBITDA of $1.93 billion and EPS of $1.13, while net debt is forecast to fall to $2.41 billion.
On multiples, Smith & Nephew shares are projected to trade at 18 times expected 2026 earnings, declining to 15.4 times in 2027 and 13.2 times in 2028. The stock’s EV/EBITDA multiple is seen at 9.6 times in 2026, 9 times in 2027 and 8 times in 2028.
Kepler Cheuvreux also projects an improving free cash flow yield, from 6% in 2026 to 6.9% in 2028. Dividend metrics are forecast to rise as well, with dividend yield increasing from 3.5% to 4.5% while dividend per share grows from $0.53 to $0.67.
Leverage is expected to fall, with gearing declining to 1.3 times by 2028 from 1.8 times in 2026, and return on invested capital improving to 12.8% from 11.1%.
Broker assessment and next steps
Kepler Cheuvreux concluded that the valuation discount applied by the market looks appropriate until Smith & Nephew can show stabilisation in its U.S. knee implant business and limit disruption in the skin substitutes segment. The broker also noted that the risk of a guidance cut is likely to remain an overhang on the shares while these issues are unresolved.
The combination of lowered forecasts, U.S. operational risks and the company’s 2026 target gap underpin the broker’s more cautious stance and the decision to reduce both the rating and the target price.