Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Boston Scientific (BSX -0.12%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Boston Scientific's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's look at Boston Scientific's key statistics:
BSX Total Return Price data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth >30% |
(10.8%) |
Fail |
|
Improving profit margin |
65.1% |
Pass |
|
Free cash flow growth >Net income growth |
589.1% vs. 68.9% |
Pass |
|
Improving EPS |
66.2% |
Pass |
|
Stock growth (+ 15%) <EPS growth |
84.5% vs. 66.1% |
Fail |
Source: YCharts.
*Period begins at end of Q2 2010.
BSX Return on Equity data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(332.7%) |
Fail |
|
Declining debt to equity |
48.7% |
Fail |
Source: YCharts.
*Period begins at end of Q2 2010.
How we got here and where we're going
Boston Scientific is in a bit of a rut today, as it's mustered only three out of seven possible passing grades. The company's bottom line, though in a better place than it was three years ago, is still buried in the red. However, free cash flow has grown substantially over the past three years. Will Boston Scientific be able to get back into the black, or is it time to pull the plug on this stock? Let's dig a bit deeper.
This has been one of Boston Scientific's best years in a long time -- its shares are up nearly 90% since the start of 2013. But why? My foolish colleague Dan Carroll notes that Boston Scientific recently got a long-awaited approval from the Food and Drug Administration for its electrophysiology business, which has grown substantially over the past few quarters. The global electrophysiology market is estimated to be worth $2.5 billion, and is growing at a rate of 10% per year. It's only a small piece of the puzzle, and investors don't seem to certain that this is the way forward (shares are down in August), but every little bit of momentum helps.
Boston Scientific's management has also blames weakness in its interventional cardiology and cardiac rhythm management businesses for low overall sales growth in the latest quarter. However, Boston Scientific is forging ahead with clinical trials for optical nerve stimulation treatments for chronic migraines, in conjunction with existing anti-migraine medication. This clinical trial may open enormous opportunities, if it can reach a fairly substantial subset of the population that suffers from chronic migraines.
Boston Scientific has also forged ahead with testing on its WallFlex Biliary RX self-expanding metal stent, has positive data on its Watchman stroke-prevention device, and earned CE Mark approval for its next-generation bio-absorbable stent. Fool contributor Dan Carroll doesn't think that this stent (the Synergy) is a better alternative to Abbott Labs' (ABT 0.63%) aptly named Absorb stent, but if it's cost-competitive, safe, and effective, it should still claim a slice of this growing market
Putting the pieces together
Today, Boston Scientific has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
