Heading into Boston Scientific's (NYSE:BSX) first quarter report, there were talks that the global medical device maker would benefit from the better-than-expected results seen from rivals like Stryker (NYSE:SYK) and Medtronic (NYSE:MDT). While I've always wanted to like this company, I've never bought into the idea that Boston Scientific stock presents any more value solely based on the performance of its peers.
Turnaround stories are indeed possible. And it certainly helps that Boston Scientific's medical devices are used in a range of interventional medical specialties. But the company has not shown the growth track record necessary to convince me that I should have taken the risk. And following the company's first-quarter earnings miss, which prompted a 6% decline in the stock, Boston Scientific has to wait a little while longer before offering its candidacy as having potential for a legitimate turnaround.
When excluding the divested Vascular business, Boston Scientific posted operational revenue of $1.77 billion, which grew 4% year over year. While that was good enough to meet management's guidance range ($1.75 billion - $1.8 billion), revenue still fell short of Street estimates by roughly $30 million.
In fairness, CEO Mike Mahoney has advanced the company past some lingering problems. Despite the lackluster sales growth, the company showed encouraging direction towards a more stabilized operation. That every segment (except Cardiac Rhythm Management) showed growth was one such example, particularly in its Interventional Cardiology business, the company's largest division, which reported low single-digit growth. Note, that division posted a loss in the prior quarter.
The company is also doing well in areas like Neuromodulation. And when you factor the mid single-digit growth in areas like Endoscopy, Peripheral Interventions and Urology, it's hard to find anything not to like with this company. The problem, however, is that Boston Scientific has been unable to show enough differentiation within the sector. Nor has the company shown it can steal market share away from Covidien (COV) in strong areas like drug-coated stents.
Although Boston Scientific's devices business has done well against both St. Jude Medical (NYSE:STJ) and Johnson & Johnson (NYSE:JNJ), investors have always placed bets that the company can grow in stents, especially when Johnson & Johnson decided it was no longer interested in pursuing the market. This left Boston Scientific with a wide open opportunity, on which it couldn't capitalize.
That said, I was nonetheless impressed with the 250 basis-point improvement in gross margins, which reached 69.73%. This was helped (in part) by 30% year-over-year decline in overall expenses. Note, in the third quarter, management had promised to cut its workforce by as much as 6%. So the expense reduction is not a surprise.
What is a surprise, however, was the lower expenses in research and development, which brings into question whether Boston Scientific can/will invest in resources to grow where it needs to. Given the highly competitive nature of this market, including the resources Johnson & Johnson is using to build growth, Boston Scientific might be on the outside looking in.
Management said it expects revenue to grow in the 3% to 5%. But that's not enough to make this stock a compelling buy today - not when there are better alternatives out there like Johnson & Johnson and Covidien.
With Boston Scientific stock trading $12.68, I don't see much upside from here beyond $13. Although the company can still turn things around, management needs to first develop a comprehensive growth strategy beyond cost-reduction to get me to buy this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's healthcare sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.