Should Investors Give Their Heart To This Company?
sayar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The other day, my neighbor had a sudden heart attack and was rushed to the hospital. He underwent treatment and came back home with a stent in his artery. I noticed that he wasn’t alone, and that heart ailments and diseases are a common occurrence affecting almost every US household. As an investor, it made me think of the companies that are manufacturing such devices used for medical treatment and the huge demand that they command.
St. Jude Medical (NYSE: STJ) came up with its preliminary revenue results for the fourth quarter ended Dec. 29, 2012. It expects to report net sales of $1.37 billion, 1% lower than the same quarter year over year after taking into account the negative impact of foreign currency. Its expected EPS may come in around $0.90 to $0.92, which is over and above analysts’ estimates by $0.02 to $0.04. This has been possible due to the cost saving initiatives adopted by the company in 2012. The fact that its actions are bearing fruit spells happiness for its stakeholders. Sales of pacemakers, defibrillators, neuromodulation, and cardiovascular products have all declined, with products to treat atrial fibrillation being the only exception, marking an increase of 10% year over year. The company has plans to further reduce its workforce by 500 people in order to reorganize its production divisions into new operating units. The shares of the company have appreciated around 4.5% in the last 12 months.
Hurdle in its step
However, the company has been in the news recently for the wrong reasons. Its manufacturing facility at Sylmar, California has come under the radar after testing and development procedures failed under a federal inspection. The company has received a warning letter from the Food and Drug Administration for deviating from unspecified good manufacturing practices. The company manufactures its Durata defibrillator leads at the Sylmar unit. Though the letter is not expected to affect any of the company’s products, it does stall the approval of devices that are already in the pipeline until violations are corrected. The company has taken responsibility and replied to the FDA with a list of corrective and quality-control measures that it's adopting.
Boston Scientific Corporation (NYSE: BSX), once a name to reckon with in the medical device manufacturing industry, seems to have lost its shine over the years. The company has faced dwindling demands, a result of immense scrutiny over its key products - heart stents and implantable heart defibrillators - coupled with a weak economy. Its acquisition of Guidant Corp. in 2006 has weighed it down and it has never been able to rise since. As we see, both St. Jude and Boston Scientific are held back by legal issues concerning similar products. Boston Scientific has plans of separating its cardiac rhythm management unit from its interventional cardiology business, and also of reducing its workforce by about 1100-1300 people in order to reduce costs.
The company has recently acquired Rhythmia Medical, which develops next-generation mapping and navigation solutions for use in cardiac catheter ablations and other electrophysiology procedures, including atrial fibrillation and atrial flutter. This acquisition is expected to strengthen the company's foothold in the electrophysiology ablation business. It has recently announced successfully treating the first patient under the ZERO AF clinical trial. These recent developments, combined with new products being launched, are rays of hope that may bring the company back.
Medtronic (NYSE: MDT) is the largest player in this industry and a force to reckon with. In an industrial scenario where its competitors are troubled by FDA regulations, it has successfully obtained the necessary approval from the FDA for its new system to treat Paroxysmal Atrial Fibrillation (PAF), thus further strengthening its Atrial Fibrillation (AF) business. Its AF business has also reflected 20% growth globally. Its focus on portfolio expansion, coupled with growth in emerging markets and the huge domestic market share, make it the best buy in the sector.
St. Jude maybe troubled due to its Durata leads, giving mileage to its competitors; however, it still remains a great stock to pump your portfolio. It has maintained decent growth over the years and its cost control measures are bearing results, ensuring decent returns to shareholders. Though there are many factors that the company needs to address to operate at its full potential, even in the present scenario I would say it’s a hold.
sayardevi has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic and St. Jude Medical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!