Has Boston Scientific Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Boston Scientific (NYSE: BSX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Boston Scientific.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

(2.5%)

Fail

 

1-year revenue growth > 12%

(6.4%)

Fail

Margins

Gross margin > 35%

65.4%

Pass

 

Net margin > 15%

(55.3%)

Fail

Balance sheet

Debt to equity < 50%

62.3%

Fail

 

Current ratio > 1.3

1.75

Pass

Opportunities

Return on equity > 15%

(43.8%)

Fail

Valuation

Normalized P/E < 20

18.87

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Boston Scientific last year, the company has given back one of the three points it gained from 2010 to 2011, as its debt-to-equity rose sharply. The stock, though, has managed a modest rise of about 10% over the past year.

Boston Scientific makes medical devices, ranging from stents and catheters to heart products like defibrillators. The industry has been a hotbed of competitive battles, as numerous players seek to defend their turf while expanding their reach. For instance, in a catheterized process known as renal denervation, which could potentially serve a 100 million patient market worldwide, Medtronic (NYSE: MDT  ) and St. Jude Medical (NYSE: STJ  ) lead the way with their own proprietary systems, but Boston Scientific bought Vessix Vascular early last month to stake its claim in the hot market.

Even in coronary stents, where Boston Scientific has had a big edge, the company faces competition. Abbott Labs (NYSE: ABT  ) is moving quickly to get its next-generation Absorb bioabsorbable stent through its pipeline to compete against Boston Scientific's Synergy stent. Whichever is first to market in the U.S. could have a huge advantage, and with Abbott having been first to the mark in Europe, Boston Scientific needs to do everything it can to be the winner this time around.

Unfortunately, Boston Scientific isn't starting from a position of strength. In its most recent quarter, sales plunged, with its interventional cardiology segment seeing a 20% decline and cardiac rhythm management revenue dropping 8%. Given that those two divisions make up half Boston Scientific's sales, that's bad news, and guidance for the current quarter hasn't been encouraging either.

For Boston Scientific to turn things around, it needs to get some of its many recent acquisitions fully integrated and producing better results. Otherwise, Boston Scientific may never reach perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Boston Scientific faces serious competition from Abbott Labs, and Abbott's upcoming spinoff of its drug business could make it an even bigger threat. But if you like Abbott now, should you choose Abbott Labs or its AbbVie spinoff to invest in? Find the answers you need in our premium research report outlining both companies, including all of their must-know opportunities and risks facing both companies. Make sure to claim this 2-for-1 report by clicking here now

Click here to add Boston Scientific to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2012, at 4:36 PM, speaktruth wrote:

    Dan doesn't hold any positions in the stocks mentioned but Motley Fool does...I suspect they own a ton judging by the number of negative BSX pieces you guys crank out...Far from objective...do your homework on STJ and MDT. STJ may be out of business this time next year if Durata gets recalled. Nice try guys. BSX doing all the right things to grow...How did MDT and STJ stack up over the last year? MDT up 11% (similar to BSX) and STJ up 3% after trading as high as $44.54...Investors are seeing a different picture...

  • Report this Comment On December 18, 2012, at 11:05 PM, rsinj wrote:

    How is the article not objective? There are 10 criteria, Dan uses these same criteria on every company analyzed with the same title as this article. There's really no subjectivity to it - the numbers are readily available from a number of sources. And again, these are the same criteria used for all companies which Dan looks at as in this article.

    My issue with Dan is that he does nothing but a cursory level review of the numbers, jams them into this table and that's the end of it. There is no analysis into how the numbers were arrived at, and if there may be something skewing them temporarily.

    If investing were nothing but a numbers game like this, I could very easily throw together a program that would simply generate this table for every traded stock, and then list those which scored 8 or higher. However, from reading a number of Dan's articles, I know that in many cases there are reasons why many seemingly poor performers (by the table) are actually worth considering. You wouldn't know this simply looking at the table, because further investigation into the balance sheet, income statement, and SEC filings are required to gain the proper level of understanding. But, using Dan's model, you wouldn't even look any further because something like BSX only scored a 3.

    I take issue with not only Dan, but also the high proportion of Fool authors who no longer "write" articles - they have a template (just like this one), they change the company name, throw in the corresponding numbers, and that's it - all the words and thoughts around it are 98% the same. This is not what might be considered journalism, due diligence, research, or analysis. My teenager could do as well - but she'd have no idea what the heck it meant.

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