Investors in Boston Scientific Corporation (BSX) have had a great year so far, as investors have been aggressively pricing in operational improvements this year.
Given the continued struggles, notably in sub-optimal profitability of its operations, analysts and I are cautious. The significant momentum makes the valuation challenging as the company still has much to prove to justify the current valuation.
Benchmark Takes A Neutral Stance
Analysts at Benchmark initiated coverage on Boston Scientific with a "Hold" rating, accompanied by a price target of $12 per share. The price target implies a modest 6% potential return from current levels.
Analyst Ian Wald believes that the company is making good progress on its efforts to improve leverage and growth. Yet the recent run up in the stock already reflects those efforts and he will look for further improvements not appreciated yet by the market, improvement in reported results, or a pullback in the stock before finding shares attractive again.
Wald remains attracted to the stock in the long term. Boston's efforts to move into higher growth markets, combined with a rejuvenating product line are long-term growth drivers.
Back in October, Boston Scientific released its third quarter results. The company ended its third quarter with $571 million in cash and equivalents. Total debt stands at $4.25 billion, for a net debt position of $3.68 billion.
For the first nine months of the year, Boston Scientific generated revenues of $5.30 billion, down 2.3% on the year before. Net losses narrowed from $4.1 billion last year to $229 million. Note that last year's losses were driven by a $4.35 billion goodwill impairment charge, compared to "just" $423 million in the first nine months of this year.
At this pace, annual revenues are seen around $7.1 billion. The company expects to squeeze out a modest GAAP profit in the coming quarter, but still expects to post a small full year loss.
Trading around $11.30 per share, the market values Boston Scientific at $15 billion. This values equity of the company at 2.1 times annual revenues.
Boston Scientific does not pay a dividend at the moment.
Some Historical Perspective
Long-term investors in Boston Scientific have seen poor returns. Shares peaked at levels in their mid-forties by 2004. Ever since, shares have steadily fallen to lows of $5 in 2011 and 2012. Following strong momentum in 2013, shares have nearly doubled year to date.
Between 2009 and 2012, Boston Scientific has reported a cumulative fall of 11% in its annual revenues to $7.2 billion. The company posted large losses in recent years, notably in 2012 when it posted a $4.1 billion loss.
While Boston Scientific has been struggling for years, at least the shares made some progress this year, despite continued struggles in its defibrillator and stent markets in the U.S.
Despite the fact that shares have seen very strong momentum so far this year, shares have sold off some 10% from their highs in October. A somewhat disappointing third quarter report, accompanied by the resignation of CFO Capello are the main reasons behind the recent correction.
While Boston has been making progress, it is still suffering from the very expensive $27 billion acquisition of Guidant in 2009. Product recalls and declining sales send shares into turmoil. Recently, Boston Scientific announced a new round of job cuts of up to 1,500 jobs to bolster profitability of the business. This latest plan to be implemented in 2014 should result in annual savings of $150 to $200 million per annum by 2015.
The problem with Boston remains the consistent and rather sizable charges for restructuring and litigation charges, depressing GAAP earnings. Even excluding these items, non-GAAP earnings are still very modest at $0.70 per share, resulting in a price-earnings ratio of 16 times on a non-GAAP basis.
Back in November of 2012, I last took a look at Boston Scientific's prospects. At the time, the company made yet another acquisition by purchasing Vessix Vascular, while the company has a questionable track record.
Ever since, shares have roughly doubled on the back of restructuring efforts, attempting to boost profitability. At the time shares were trading about 1 times annual revenues, yet the very poor acquisition track record, continued "one-time" expenses and structural lack of earnings were reasons for me to remain cautious.
While I appreciate the progress, which has been made during the calendar year of 2013, some sort of recovery is undoubtedly justifiable in the share price. Yet the significant momentum this year, with shares trading at double the levels of last year, made shares a bit too expensive given the significant challenges ahead.
As such I agree with analysts at Benchmark, believing the momentum in 2013 is too much, as the market has been aggressively pricing in improvements. I remain on the sidelines as well.