Boston Scientific Is A Healthy Long-Term Buy

Oct.19.11 | About: Boston Scientific (BSX)

Boston Scientific Corporation (NYSE:BSX) is at the heart of medical device development and sales, literally: Its main business is producing devices that monitor the heart, and various implants, stents, and other products that are used in the treatment of cardiac and related diseases. Like the body’s arteries, its business streams spread out to other parts of the body, encompassing areas such as lungs, digestive systems, urinary stone disease, pelvic disorders, and chronic pain management.

Boston Scientific is currently trading around $5.50, and the mean 12-month price target from analysts researching the stock is $7.82 (42.10% upside potential). This stock is trading lower than its 50-day exponential moving average of $6.11 and its 200-day exponential moving average of $6.64. This is a common story within the sector, as share prices have fallen through the last few months since the agreement on the US debt ceiling, along with cuts in healthcare spending, was announced. Earnings per share for the last year were $0.40, and these are expected to increase to $0.53 in its next fiscal year (ending Dec 2012). These numbers place the shares on a current price-to-earnings ratio of 14.08, and a forward multiple of 10.55.

Unlike competitors Johnson & Johnson (NYSE:JNJ), and St Jude Medical (NYSE:STJ), Boston Scientific pays no dividend. To income investors, the yields of JNJ (3.50%) and STJ (2.20%) would make those shares more attractive than the shares of Boston Scientific, but capital growth investors might see better returns from BSX.

Current operating margin is 14.77%, with a return on assets of 3.24% and a return on equity of 5.53%. The current revenue from its income statement is $7.82 billion, and last quarter’s revenue showed year on year growth of 2.40%. BSX has cash of $170 million, and a total of $4.20 billion in debt. The company’s debt/equity ratio is 36.40, in line with JNJ’s number of 30, and far easier on the eye than STJ’s debt/equity ratio of 53. Others, such as Medtronic (NYSE:MDT), with a debt/equity ratio of 61.52, are even less favorably financed.

Looking at the graph below, BSX has recently performed poorly when compared to both the Dow Jones industrial average and JNJ shares over the past three months. The share price has been negatively affected by a combination of analyst downgrades and poor sentiment in the sector. Revenue estimates are being downgraded as both government and personal spending plans are affected by decreasing economic activity. Surgeons are finding that patients are delaying surgery and electing to suffer pain, while the fear of job loss is foremost at mind. High unemployment and the related lack of health insurance is also affecting the industry. This decrease in health spending in the personal sector is a natural step in the economic cycle.

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BSX is due to release third-quarter figures October 20, and current estimates center around profits of $0.08 per share, compared to last year’s third quarter number of $0.12 per share. Revenues are expected to be more resilient, falling just 0.3% from $1.92 billion to $1.91 billion. This is commensurate with targeted earnings for the year of $0.45 per share, and rising to $0.53 per share next year. By comparison, JNJ’s recently reported third-quarter earnings showed a revenue decline of almost 7%.

Boston Scientific’s share price has, in my view, been penalized too heavily by the market. News such as its full enrollment in clinical trials to evaluate its WallFlex Biliary RX covered stent -- in a market segment from which Abbott Laboratories (NYSE:ABT) announced its withdrawal in June due to decreasing market share -- shows that the company is preparing for growth in its specialized areas.

With the share price at the low end of its 52-week trading range of $5.41 to $7.96, a forward price-to-earnings ratio of less than 11, and a reported book value of $7.55, BSX is a stock that I believe offers excellent value in a poorly performing sector. It's a buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.