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The past couple of years have been tough on medtech companies. Few of the industry leaders that derive their revenue solely from medtech sales have had a rougher time than Boston Scientific Corporation (NYSE: BSX ) . While industry stalwart Medtronic, Inc. (NYSE: MDT ) has posted steady gains, Boston Scientific has been losing ground over the past 5 years.
The cardiovascular segment remains the company's largest, but sales during the third quarter of 2013 were a paltry $667 million; that would be $2.67 billion on an annualized basis. In 2007, that figure was $6.56 billion. That is a slight improvement over 2012's dismal performance, however, when the company's share price nearly fell through the $5 dollar range.
The intensely competitive fields, cardiac rhythm management (CRM) and interventional cardiology, still represent the majority of the company's sales. The bleeding has stopped from the CRM segment, but growth is currently flat. Bringing those numbers up will be a difficult task going forward. Over the past several years, Medtronic also had difficulty achieving growth in its CRM segment. Its sales in the most recent quarter were up 4% year over year at $1.27 billion, however. Odds are that Boston Scientific will continue to operate in its shadow.
Pounce on the weak
Although Boston Scientific might not be stealing Medtronic's piece of the CRM market, St. Jude Medical Inc.'s (NYSE: STJ ) grip has been slipping. Trouble with device leads led to a recall of its Riata device.The company has invested heavily in newer Durata devices. Rumors early this year about the continued trouble with its leads haven't helped sales at St. Jude's Implantable Electronics Division. For the first nine months of 2013, net sales of $2.39 billion were down 3.7% as compared to the same period in 2012.
Beams of hope
On the bright side, Boston Scientific has had some luck recently with neuromodulation. During the third quarter of 2013, the neuromodulation segment grew on year by 31% in domestic, and 41% in international markets. At $116 million in the third quarter, it represented 6.7% of the company's net sales. Although company management admits that this pace is not sustainable, the growth rides on the back of two products recently approved for use in the EU. The Precision Spectra pain relief system received its CE mark in the first quarter of 2013. The Vercise device for treatment of Parkinson's received a CE mark in the third quarter of 2012, and is currently in a pivotal trial in the United States.
Geographically, Boston Scientific can look to Brazil, Russia, India, and China (the BRICs) as a source of growth going forward. Ex-U.S. markets comprised just 41.6% of the company's sales in 2010. During the first nine months of 2013, that figure has risen to about 48%. In the third quarter of 2013, net sales to the BRICs increased by nearly 30%.
In the right industry for a turnaround
According to analyst surveys compiled by the Evaluate Group, the global medtech industry is expected to outpace pharmaceuticals over the next five years with a CAGR of about 4.5%. The same survey suggests that Boston Scientific will grow at a rate of about 2%, although the market seems far more optimistic. The company's recent price suggests its topline growth will outpace the industry as a whole, but that's not all. It appears that the market is also assuming its operating margin, which has been underwater for most of the past five years, will outshine its peers.
The expectations of the market aren't unfounded. Boston Scientific has made some impressive progress on this front. Gross margins have risen to a level not seen since 2008. In an effort to further control costs, the company has also been steadily reducing not just its employee numbers but R&D spending as well.
With an EV-to-EBITDA ratio of nearly 24, it seems the market is already anticipating Boston Scientific's success in its turnaround. This might not be the best time begin a long position. With earnings still hovering near zero to slightly negative, a hiccup in the company's operations is likely to be amplified in its share price.
Despite the troubles of the past several years, the company's balance sheet remains strong. Free cash flow is nearly enough to pay down the company's long-term debt in less than a decade, so solvency shouldn't be an issue going forward. In an industry full of embattled companies, I'd say this one has a better chance than most of successfully turning itself around.
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