Medical device maker Boston Scientific (BSX 5.04%) reported its third-quarter earnings on Thursday, exceeding Wall Street estimates on both the top and bottom lines. However, it followed that announcement with a barrage of other stuff, including layoffs, the resignation of its CFO, and two new approvals in China and Europe.
What do all these new developments mean for investors in Boston Scientific, which has risen more than 120% over the past 12 months?
Source: YCharts.
A strong third quarter
For its third quarter, Boston Scientific reported adjusted earnings of $0.17 per share, nearly double the Thomson Reuters' consensus estimate and $0.01 higher than its adjusted earnings from the previous year. Revenue dipped 1% to $1.74 billion, but it still topped the analyst forecast of $1.72 billion.
However, in comparison to the most-recent quarterly earnings reports from Stryker (SYK 1.45%), St. Jude Medical (STJ +0.00%), and Medtronic (MDT 1.23%), Boston Scientific's growth doesn't look very impressive. In addition, the stock trades at a substantial premium to all three companies, based on its forward P/E.
| Company |
Revenue Growth (YOY) |
Adjusted EPS Growth (YOY) |
Forward P/E |
|
Boston Scientific |
(1%) |
6.3% |
22.3 |
|
Stryker |
4.8% |
(70.7%) |
16.1 |
|
St. Jude Medical |
0.9% |
48.9% |
14.4 |
|
Medtronic |
1.9% |
10.3% |
14.1 |
Sources: Quarterly earnings reports, Yahoo! Finance as of Oct. 29.
Stryker, the only company that Boston Scientific beats on the bottom line, would actually have posted higher earnings if not for continuing expenses related to two voluntary recalls last year.
Boston Scientific's top line growth was roughly in line with sales at Johnson & Johnson (JNJ 1.56%) and Abbott Labs' (ABT 0.84%) medical equipment businesses, which respectively declined 2% and grew 1.9% during the third quarter.
A closer look at Boston Scientific's three main businesses
Boston Scientific generates revenue from three main business segments -- cardiovascular (catheter tubes, stents), rhythm management (pacemakers), and MedSurg (surgical tools). During the third quarter, only the MedSurg segment reported positive growth.
|
Segment |
Third-Quarter Revenue |
Growth (YOY) |
Percentage of Total Revenue |
|
Cardiovascular |
$667 million |
(2%) |
38% |
|
Rhythm Management |
$498 million |
0% |
29% |
|
MedSurg |
$568 million |
9% |
33% |
Source: Boston Scientific third-quarter earnings report.
The company attributed the robust growth of the MedSurg segment to strong demand for neuromodulation, endoscopy, and women's urology products. In this segment, its endoscopy products are the most important, reporting an 8% year-over-year gain and accounting for 57% of total MedSurg sales. By comparison, Stryker's endoscopy products, which account for 35% of its MedSurg segment's revenue, posted 10.5% growth last quarter. Boston Scientific's 32% sales growth in neuromodulation products also easily outpaced sales at St. Jude Medical, which only reported 3% sales growth in its neuromodulation business last quarter.
Meanwhile, Boston Scientific's cardiac rhythm management segment, which primarily competes against Medtronic, the 800-pound gorilla in the pacemaker space, posted flat sales growth. Medtronic's cardiac and vascular group, which includes the sales of pacemakers, defibrillators, and other heart technologies, reported sales growth of 2% last quarter. St. Jude Medical, by comparison, reported 1% sales growth in its cardiac rhythm segment.
Meanwhile, Boston Scientific's cardiovascular business reported 3% growth in peripheral intervention products, which was offset by a 4% decline in interventional cardiology products, resulting in a 2% year-over-year decline. This has been a tough, slow growth market for the primary players. Last quarter, St. Jude's cardiovascular business only inched up 1% from the prior year quarter. Meanwhile, sales at Abbott's vascular products segment declined 0.2% but inched up 1.6% at J&J.
Boston Scientific and its industry peers all face similar headwinds -- the unclear outcome of the U.S. medical device tax debate, reduced hospital budgets, a decline in the number of elective surgeries, European austerity measures, and unfavorable currency exchange rates.
Layoffs and a change of leadership
Boston Scientific also announced that it would lay off up to 1,500 workers by the end of 2015 in an effort to cut costs, as part of an ongoing effort to increase efficiency, reduce operating expenses, and boost margins.
As seen in the following chart of the company's past three years, Boston Scientific's expenses have been outpacing its revenue growth, and the volatility in its operating margin has made it tough to maintain profitability on a non-adjusted basis.
Source: YCharts.
In my opinion, any steps Boston Scientific can take toward stabilizing its costs and margins will be positive catalysts moving forward. CEO Mike Mahoney expects the layoffs to cut annual expenses by $150 million to $200 million, and boost operating income margin from 19% to 25%.
In addition to the workforce reduction, the company's longtime CFO, Jeff Capello, also announced that he will step down at the end of the year, handing over the reins to Dan Brennan, who previously served as the VP of finance and information technologies for the cardiovascular division.
Those two abrupt announcements rattled investors, causing shares to slide more than 5% over the past week.
New opportunities for growth
Looking ahead, Boston Scientific intends to achieve higher growth in emerging markets. Last quarter, the company reported combined year-over-year sales growth of 29% in Brazil, Russia, India, and China on a constant currency basis.
Boston Scientific also opened two new major facilities in China, where the Chinese FDA recently approved its Alair bronchial thermoplasty system for patients with persistent asthma. The device, which the company acquired in 2010 from its $193.5 million acquisition of Asthmatx, is recommended for patients who are unresponsive to traditional treatments such as inhaled corticosteroids and long-acting beta agonists.
Boston Scientific also recently announced that its Lotus Heart Valve had been approved in Europe -- an announcement that crushed its rival Edwards Lifesciences, which had been relying heavily on sales of a competing heart valve. Boston Scientific also reported positive interim data for its Vessix hypertension treatment, which was found to significantly lower blood pressure levels in patients who are unresponsive to drug therapy.
Both new products could eventually boost sales at Boston Scientific's lagging cardiovascular segment.
The Foolish bottom line
Although Boston Scientific's shares are currently near 52-week highs, investors should remember that the stock traded in the $40s nearly a decade ago.
The future of Boston Scientific looks fairly solid, considering the company's cost-cutting initiatives and new approvals. However, you should remember that the company is trading at a premium relative to the rest of the industry, which means that the stock could be hit harder than its peers during a market pullback.
