Questions About Smith & Nephew
We are maintaining a Hold recommendation on Smith & Nephew, Plc (SNN), after the British medical device maker's first-quarter results. The company is benefiting from its Earnings Improvement Program, and we believe the recent stock buyback should provide support to the stock. The stock is trading below its peers, but with the uncertainty surrounding sales practices at its European subsidiary, there is little upside in the near term.
The company follows an effective strategy of investing a significant amount in research and development activities, to bring new products to market. This strategy has yielded results in the past, and should contribute to growth going forward. To meet the increased demand for new and existing products, the company intends to grow its sales team by at least 10 percent per year, a process that particularly bodes well for the rapidly growing orthopaedics segment.
However, this division faces tough competition in both domestic and international markets. While increasing its sales force is helpful, SNN might do better if it were to buy out smaller rivals.
The stock is currently trading at 18.0x our 2008 EPADS estimate which is slightly lower than the average of its peers of 19.6x. Our six-month price target is $57.
Upping Buy-Rated Wet Seal Ests
We continue to believe that casual-clothing retailer Wet Seal, Inc. (WTSLA) is taking the appropriate steps to compete in this difficult retail environment. What's more, we are impressed with the strength of its core Wet Seal stores, which are driving the company's overall sales and earnings growth. As a result, we reiterate our Buy rating and raise our target price to $5.50 from $4.50.
The combination of record levels of debt and declining home prices have negatively impacted the credit markets, which is also pressuring consumer spending by limiting the consumer's access to the debt markets through home equity loans. Currently, Wet Seal is ranked second out of 42 companies in the Zacks Shoe and Related Apparel industry. Despite being up over 80 percent year-to-date, WTSLA shares are still down about 25 percent over the past twelve months. We believe the shares still trade at an attractive valuation and have room to run higher.
WTSLA shares trade at 10.7x our fiscal 2008 EPS estimate and 9.7x our fiscal 2009 EPS estimate. These P/E multiples are discounts to industry peers and below our estimate of the company s long-term earnings growth rate. Moreover, the company has net cash per share of $1.19. The stock is cheap, and its cash position provides a nice safety cushion for investors.
