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St. Jude Medical Gets Too Much Praise

Management said that the weakness in CRM was due to soft sales in pacemakers, which declined 11%, along with a 4% decline in the company's implantable cardioverter defibrillator (ICD) business. Even though the top line was broadly unimpressive, management made up for it in profitability - albeit not as great as the valuation currently commands. Nevertheless, although gross margin and operating income declined year over year, both arrived better than expected.

What's the Deal With ICD?

The ICD business has been St. Jude's biggest issue lately, given that it has garnered FDA attention. In fact, it's gone as far as St. Jude receiving a written warning by the FDA regarding the safety of the company's Durata leads. However, to St. Jude's credit, the company has done pretty much everything in its power to ensure the leads are safe.

Not only has the company placed the leads through rigorous tests before their launch, St. Jude has also maintained a registry of each one so that their performances can be tracked over time. Given how well the stock has performed over the past several months, it would seem that investors are content with this effort. Besides, it doesn't seem as if the Street is concerned about potential recalls, nor are there worries that St. Jude will lose market share as a result.

The consensus is that St. Jude will emerge out of this unscathed. I remain unimpressed by the company's segmental results, where St. Jude is being outperformed by Johnson & Johnson (JNJ). Plus, given the 11% revenue decline in pacemakers, it's not a stretch to suggest that market share is being lost to (among others) Boston Scientific (BSX).

What of the Stock?

Although there are legitimate concerns regarding growth, the key is how well St. Jude can emerge out of the ICD situation. The valuation presumes that the Street has already priced in a victory. That's a big risk, especially now that the stock has approached expensive territory. That said, it's not unrealistic to expect higher gains if/when a victory becomes official. But strictly on a valuation perspective, these shares are (at best) fairly valued.

At the time of publication, the author had no positions in stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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