At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best …
You've probably heard by now that Johnson & Johnson (NYSE: JNJ ) is abandoning the stent market. Its exit means one less competitor for Medtronic (NYSE: MDT ) , Abbott (NYSE: ABT ) , and Boston Scientific (NYSE: BSX ) -- and that should be good news for all three survivors, right?
Well, maybe not for all of them. Or maybe just not good enough news.
That's the upshot of Friday's ratings downgrade for Boston Scientific, courtesy of the friendly stockpickers at UBS. While admitting the possibility of near-term "margin expansion" and praising the firm's "pipeline expansion & commercial repositioning" as "constructive," UBS still worries that the stock will "remain range-bound" until growth prospects improve. And such improvement, says UBS, is probably still a few years off.
Crunching the numbers, UBS says at the middle of its range Boston Scientific will report $0.39 per share in earnings this year and then grow that to $0.54 in 2012 as its profit margin on stents increases. Problem is, revenue growth is going to stay stuck in the low single digits, limiting the potential for earnings improvement farther out. With the stock already selling for more than 18 times earnings -- a richer valuation than any of Medtronic, Abbott, or Johnson & Johnson sports -- UBS worries that that's not a fast enough growth rate to justify buying Boston Scientific anymore and so it downgraded to "neutral." Is that the right call?
Let's go to the tape
It's hard to say. After all, UBS doesn't have the greatest record when it comes to picking health-care equipment stocks. UBS is an ace stockpicker in pharmaceuticals, where the majority of its picks outperform the S&P 500. But over the five years we've been tracking its performance, UBS has gotten only about 45% of its med-equip picks right. For every Edwards Lifesciences (NYSE: EW ) it pitches us, UBS also strikes out on at least one Smith & Nephew (NYSE: SNN ) :
|
Company
|
UBS Rating
|
CAPS Rating
(out of 5)
|
UBS's Picks Beating (Lagging) S&P by
|
| Edwards Lifesciences |
Outperform |
** |
238 points |
| Smith & Nephew |
Outperform |
*** |
(13 points) |
Both stocks, I should add, should have had better chances of outperforming the market than did Boston Scientific, inasmuch as they have more favorable PEG ratios. On the other hand, on this particular stock, UBS has proved prescient in the past. It's recommended buying Boston Scientific twice in the past three years and is so far beating the market by about 28 percentage points on those two purchases. So the fact that UBS has now gone lukewarm on Boston Scientific should perhaps carry more weight than we'd otherwise give it.
By the numbers
When you look at the stock independent of the analyst that's now panning it, there really doesn't seem to be a compelling reason to own Boston Scientific today. You see, the 18 P/E ratio on BSX is only the beginning of its problems. The company also carries a hefty debt load of nearly $5 billion ($4.3 billion net of cash.)
And speaking of cash, it's not generating nearly as much of it as its income statement suggests. Flip over to Boston Scientific's cash-flow statement, and you'll find that over the past 12 months, the company actually generated only about $241 million -- less than half its reported net income.
Foolish takeaway
I don't mean to dismiss UBS's projection of a quick uptick in profit for Boston Scientific next year. Still, even if you factor that into the mix and project earnings out over the next five years, most analysts on Wall Street still expect the company to average only about 6% annual earnings growth through 2016. To me, such 6% growth can't justify this stock's 18 P/E ratio. It's even less defensible in the light of a price-to-free cash flow ratio that approaches 44.
My advice: If you're looking for a health-care stock with a mid-single-digits growth rate, you may be better off examining the stock we profiled last week -- Bristol-Meyers Squibb (NYSE: BMY ) , even if it occupies a different space in the industry. At 15 times earnings, it's cheaper than Boston Scientific, boasts a balance sheet free of net debt, and pays a 4.5% dividend. Although it's not exactly dirt cheap, recent successes are easing concerns about future revenue, and Bristol-Myers could be a better fit for your portfolio than Boston Scientific.
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