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It's great to find smaller companies which are undervalued and have growth potential. But there should be another catalyst for buying such companies. On the dip. And a big one at that.

About St. Jude Medical

St. Jude Medical (NYSE:STJ) is a medical technology and services company which is based in Minnesota. They focus in cardiac rhythm management, atrial fibrillation, cardiovascular, and neuromodulation. It has a market cap of $10B+ and is 89% institutionally owned.

The Opportunity

On November 21, St. Jude dropped as much as 15% from the previous day due to the questioning of the safety of its Durata wire for heart devices by government inspectors. However, the drop proved to be overdone, as on the same day, it already bounced from the low of $30.25, and continued trending higher the following week.

STJ Drop
Google Finance

The Fundamentals

~ Book Value per Share - 10 Years ~

STJ 10Yr Price to Book Per ShareYCharts.com

It's reassuring to see that St. Jude Medical's book value per share has been rising steadily for 10 years.

~ The Historical View: 15 Years ~

Looking at the 15 year F.A.S.T. Graph, it's interesting to note that it has been in somewhat a sideways channel since 2005. However, the earnings line has surpassed the price line since 2009, indicating the company is undervalued.


- price line - black line
- earnings line - orange line
- normal P/E ratio - blue line
F.A.S.T. Graph

~ The More Recent View: 5 Years ~

Looking at the 5 year F.A.S.T. Graph, St. Jude Medical still looks undervalued. According to the normal P/E ratio, STJ should be at $45.91 by the end of the year. But, we all know that companies can stay undervalued for years.

STJ 5 Yr FAST Graph
- price line - black line
- earnings line - orange line
- normal P/E ratio - blue line

STJ (P/E: 10.1)15 Yr10 Yr5 Yr
Normal P/E Ratio23.221.513.4
Operating Earnings Growth Rate16.2%14.1%8.9%

* Data from F.A.S.T. Graph

Its decreasing trend of normal P/E ratio and operating earnings growth rate suggest St. Jude Medical is slowing in growth, and turning into a value stock. With its recent price drop, it's an opportunity to scoop up some shares of this undervalued company. Especially, looking at the long term 15 year chart, we can see that the company is deeply undervalued. With its consistency in increasing earnings, there's reason to believe that the market will eventually see the value in this company.

~ Free Cash Flow - 10 years ~


YCharts.com

St. Jude Medical's free cash flow appears to be cyclical, but it's in a general uptrend. Further, STJ's debt-to-equity ratio of 0.53 is manageable. In 2011, it started paying a dividend of $0.21/share each quarter (or $0.84/share per year). In 2012, it raised the dividend 9.5% to $0.23/share each quarter (or $0.92/share per year). With a payout ratio of 38%, St. Jude Medical should not have a problem continue raising its dividend in 2013.

Word of Caution

Because St. Jude Medical has a high percentage of institution owned shares, and it is a relatively smaller company, it can have huge drops like the one that occurred on Nov 21. However, those are also the best opportunities to scoop up some shares.

Summary

St. Jude Medical is an undervalued company both short-term (5 year outlook) and long term (15 year outlook). With its consistent earnings, manageable debt, and low payout ratio, a long term investor can benefit from buying it on the dip, and holding for dividend growth and capital gain.

Please use this article as initial research and do your due diligence before making an investment.

Source: Buy St. Jude Medical On The Dip