St. Jude: Med-Tech Stock that Seems Unlikely to Keep Flatlining

St. Jude (STJ) (38, $13bln market cap), the smaller of the two Minnesota-based global "cardiogiants", has been on my watchlist since late 2006, standing out for its tenure with absolutely no action from me ever. Companies go onto my watchlist and usually are ultimately either bought or expelled as circumstances change. STJ just sits there, just like its stock (click to enlarge):

I almost called this a "38 Special", as the stock has traded at 38 in each of the past 6 years. Since I started watching the stock closely, it has outperformed the market, but only marginally. The next chart (click to enlarge), though, shows that it's only the stock that has been sitting, as sales and earnings growth have both been quite healthy:

While it hasn't all been organic, with several acquisitions in recent years, the stock has flatlined while earnings have compounded at almost 17% for the past five years. While I struggle to differentiate the cheapness here from the rest of the Med-Tech sector (see my holdings if you want to know my view), I can't help but conclude that this stock has a fantastically favorable risk-reward potential.

Reasonable people can question the future growth potential and the risks of Obamacare, but the stock sure seems to price in a lot less prosperous future than the past decade. The stock is pretty close to the lowest valuation over the past decade in terms of P/E, P/S and /PB (click to enlarge):

So, this is really an elevator pitch today, not a hard-sell. I am not sure if I will end up buying it or not. As I said previously, there are so many choices available in the Healthcare sector for those interested in "franchise" names like STJ. Here are some of the things I like, in random order, besides the low valuation:

• CEO owns 8mm shares, CFO 900k
• Higher R&D than peers with tangible evidence of success
• High International (almost 50%)
• AF is hot
• Decent, but not stellar, balance sheet - $800mm net debt before large Q3 share repurchase
• Since 2006, it has been outperforming the market despite cheapening

Here are a few concerns:

• CapEx is consistently significantly higher than Depreciation
• Lots of legal activity (especially Epicor DoJ issue)
• A couple of GMP warning letters
• I am not so sure about the push to Neuromodulation

Maybe I'll just keep "watching" this one, but you can bet I will be watching it much more closely than usual given its tantalizing valuation. I suppose if it drops enough below 38 I will play for the chance of seeing it get back there for the 7th consecutive year. Big Pharma seems busted forever, but Med-Tech continues to realize innovation. I believe that the intersection of a global recession and fears of price controls are creating a great entry in the space for growth to meet value, and STJ is a great example.

Disclosure: Just watching!

Comments

[User 419067:]

You are sooooo corect!

Oct 04 11:00 AM

[Alan Brochs...:]

They just pre-announced - I am starting a position near 34

Oct 06 08:26 AM