Smith & Nephew plc (SNN)

Total return at 5 years: 14.3%/year = 11.2% appreciation + 3.1% dividend. The target price ($49) is ex-dividend; the $5 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $71 · Multiples $44) exceeds the market price ($29).

Today — fairly valued: at $29 trades ~34.6% below its value discounted to today (~$44); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — Infravalorado: the target price ($49) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$28.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($29) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-10.2%/year) than we project (6.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$0.7 bn of owner earnings in year 5 (vs ~$1.6 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on NOPAT (EV/NOPAT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 = twelve-month window closed on June 27, 2026 (rolling grid: fiscal year 2025 plus first-half 2026 minus first-half 2025). Depreciation and amortization is taken from the 20-F FY2025 cash flow statement (US$573 million for fiscal year 2025) and not from the XBRL concept «DepreciationAndAmortisationExpense», which stopped having facts after 2018 —the issuer migrated tags and it is not replaced by a neighboring concept without declaring it—. The valuation metric is trading profit (NOPAT on the adjusted operating profit the company reports by segment under IFRS 8), not IFRS operating profit, because the medical technology archetype's band is calibrated on adjusted earnings. Year 1 anchors to first-half 2026 guidance (the August 4, 2026 release, identified by hand because the company seals the period of its releases): revenue growth of approximately 4% underlying (cut from ~6%), equivalent to ~5.2% reported at the July 31, 2026 exchange rates; trading profit of approximately US$1,300 million after the Integrity Orthopaedics acquisition; free cash flow of approximately US$800 million; adjusted return on capital above 10%. Years 2 and 3 accelerate toward the new three-year strategy's target (6% to 7% organic growth, 9% to 10% trading profit expansion toward 2028) before decelerating to a mature pace by year 5. The historical net buyback (876 to 873 million diluted shares between 2024 and 2025, less than 1% annually) is below the threshold that requires modeling an explicit share count path, so the count is held constant and the surplus accumulates in cash, though with a retention near zero because the dividend plus the buyback already consume nearly all of today's actual free cash flow.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $49 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $29, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $49 in 5 years plus $5 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $44. Against the current market price ($29), the margin of safety is 34.6% (trades below the maximum → there is margin) and the total return at that price would be 14.3% annually.

• Multiple in the lower half of its band. 17 times after-tax trading profit at 5 years, below the midpoint of the medical technology band (16-22 times).
• Trades near its 52-week low. The current price is 25% below the high of the last 52 weeks.
• Modest dividend yield. The declared dividend of US$0.782 per depositary receipt represents a yield of approximately 2.7% at the current price.
• Margin of safety present but limited. It trades at a real discount to value, though short of the required margin of safety.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (114%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Improving cash generation. Free cash flow nearly tripled since 2023 (US$129 million) to US$840 million in 2025, above the initial guidance.
• Return on capital below the bar. The adjusted return on capital of 8.3% in 2025 remains below the 10% the method requires, though improving from 7.4% in 2024.
• Moderate reinvestment runway. Maintenance capex is in line with depreciation; growth is funded by released working capital more than by aggressive fixed-asset expansion.
• Healthy cash conversion. Operating cash flow (US$1,549 million in 2025) grew faster than net income, a sign of earnings quality rather than receivables buildup.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Sub-segment revenue comes from the segment note in the 20-F FY2025, in dollars by fiscal year (2023, 2024, 2025). Smith & Nephew does not disclose physical volume (number of procedures or units) in management's discussion, so the available operating driver is revenue by product line within each business unit, not a volume-times-price breakdown.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (27-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Even organic growth. All three business units grew between 5.1% and 5.6% on an organic basis in 2025, without relying on a single segment.
• 2026 guidance cut. The company lowered its underlying growth guidance from ~6% to ~4% for 2026, a sign that the market is already correcting expectations.
• Ambitious medium-term target. The new strategy targets 6% to 7% annual organic growth toward 2028, above the recent pace.
• Currency tailwind. 80 basis points of 2025 reported growth came from currency, not the underlying business.

• Three evenly matched units model. Orthopaedics, Sports Medicine, and Wound Management all grow above 5% organic in 2025, with no segment dragging down the rest.
• Third-party-governed reimbursement. Prices are mostly set by public healthcare systems, which limits the company's pricing power.
• Manufacturing concentration. Production is concentrated in a small number of plants, with direct exposure to tariffs and to single suppliers of certain raw materials.
• Active innovation cycle. More than 60% of 2025 growth came from products launched in the last five years, on US$296 million of research and development spending.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 1.6x
• ✓Interest coverage (EBIT / interest)11.1x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 114% of ROIC
• ✕Value creation (ROIC − 10% bar)-2pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.8x — no over-investment
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 0.9% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Moderate leverage. Net debt of US$3,019 million, equivalent to 1.8 times adjusted EBITDA, according to the company itself.
• Cash limited relative to debt. US$754 million of cash against US$3,785 million of gross debt at the close of the first half of 2026.
• Buyback program under way. US$500 million announced in May 2026, with US$216 million already executed as of August 3, 2026.
• Quantified contingent liability. US$97 million provision for product liability claims tied to metal-on-metal hip implants.

• Newly launched strategy. The three-year strategy was announced in December 2025 with concrete targets toward 2028; it still has no execution track record.
• Stated capital discipline. The inventory rationalization program and the 35% to 40% adjusted-earnings payout policy show an explicit capital allocation framework.
• Bolt-on, not transformative, acquisitions. Integrity Orthopaedics (up to US$450 million) is a moderately sized acquisition, consistent with an organic-growth-first approach.
• Insider ownership not verifiable. With no proxy circular available under the 20-F format, the ownership detail of directors and executives is not confirmed in this analysis.

• Limited analyst coverage for a medical technology company that trades as a U.S. depositary receipt over a UK ordinary share, splitting liquidity between two markets.
• Reported accounting profit was depressed for several years by restructuring charges and the US$159 million non-cash charge from the inventory rationalization program recognized in 2025, which does not repeat.
• The new three-year strategy was only announced in December 2025 and still has no full quarter of results to validate it, which leaves the market skeptical about whether the profitability target will be met.

The stock trades near its 52-week low (US$28.66-US$38.70), 25% below its high. Part of that discount is genuine: the adjusted return on capital, 8.3% in 2025, remains below the 10% bar, and the annual report itself documents price pressure from group purchasing organizations and the volume-based procurement program in China, so not all of the decline is a mispricing. But there are also signs of motivated sellers and missing buyers: accounting profit was depressed by non-recurring charges that have already reversed or stopped recurring, free cash flow nearly tripled since 2023 while the price did not reflect it, and the newly launched strategy still has no execution track record the market credits it with. It trades at a real discount to value, though short of the required margin of safety.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +5%/year (+30% total): the margin of safety protects the downside. The bull (+20%/year, +149% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Supply chain. Manufacturing concentrated in a small number of plants, with exposure to tariffs and single suppliers of raw materials.
• Strategy execution. Ambitious targets toward 2028 with no execution track record yet.
• Competitive and price pressure. Group purchasing organizations and the volume-based procurement program in China push prices lower.
• Regulatory dependence. Changes in coverage and reimbursement rules can affect specific segments, as already cited for 2026.
• Product litigation. Active US$97 million provision for metal-on-metal hip implants.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROIC 8% does not clear the 10% bar.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 7% at a multiple/growth of 2.4 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 8% (EBIT/EV) + ROIC 8% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -10% vs our 7%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +2%/yr, bull-scenario ceiling +17%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: intangibles, switching costs, efficient scale → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -10%, within what we project (7%) — the story squares with the numbers.