Don't Overlook Problems at St. Jude

NEW YORK (TheStreet) -- Say what you want about Wall Street's "unpredictability," but when investors' minds are made up about a company, there's often little that can change that sentiment. It goes both ways. If you're on the Street's good side -- like St. Jude Medical (STJ) appears to be -- it's a great position to be in. Or is it?

While St. Jude has enjoyed years of solid performances in the medical devices industry against rivals like Johnson & Johnson (JNJ) and Medtronic (MDT), its execution has been anything but flawless. St. Jude's Riata and Durata leads, made to help prevent heart failures, have been failing, thus hurting the company's reputation.

These at-home leads should help carry electrical impulses to the heart and provide information from the heart back to the devices. However, overwhelming reports of malfunctions due to premature insulation failure not only resulted in product recalls, but also generated class-action claims.

Making the situation even more dreadful, the company is now operating under several written warnings from the Food and Drug Administration. On top of that, there are now worries about the company's product pipeline, which lacks the growth potential of Medtronic.

Despite constant streams of negative news, the stock is perched near its 52-week high, which suggests Wall Street cares very little about these details and has made up its mind. While this is bad news for the bears, which have waited for a better entry point on the stock, the bulls shouldn't count their chicks just yet, either.

It's true the company beat third-quarter revenue estimates. In fairness, I was impressed by St. Jude going toe-to-toe with Johnson & Johnson, especially in areas like atrial fibrillation, which posted a solid 10% (constant currency) year-over-year growth. That St. Jude missed Johnson & Johnson's mark by only 1% shows the potential there is in this business.

However, considering the gloomy picture I've just outlined, I don't believe St. Jude's overall revenue performance, which grew just 1% year-over-year, supports the optimistic outlook reflected in the stock price.

While there were indeed other positives in the report, such as the noticeable improvements the Implantable Cardioverter-Defibrillator (ICD) business, it was clear by the sluggish output in Neuromodulation that consumers have not yet forgiven St. Jude. The FDA's warning letter to St. Jude, which I believe has scared some customers, adversely impacted the company's performance.

I'm not suggesting that St. Jude is a bad company. Nor do I believe its supporters are misguided. I can't ignore the fact, though, that St. Jude missed the Street's gross margin estimates by more than 0.6%. What this tells me is that St. Jude's ongoing negative press has now begun to take a toll on the company's operations.

As with other rivals like Abbott Labs (ABT) and Johnson & Johnson, I appreciate the adverse impact of foreign currency exchange rates -- one of the explanations given by St. Jude's management for the weak results. Still, as investors stand and applaud, the magnitude of a 5% profit decline sticks out like a sore thumb to me.

It's not St. Jude's fault that investors have fallen in love with the stock. The way I see it, relative to Johnson & Johnson, Abbott Labs and, to a lesser extent, Stryker (SYK), this is now the fourth-consecutive dismal quarter for St. Jude. To that end, despite the excitement shown in the stock, I won't go near this company without surgical gloves.

I'm not saying anything here that I haven't said in many other articles where investors' expectations seem out of balance. But when you combine the obstacles St. Jude is facing, along with disappointing results and an expensive stock, it's a recipe for disaster.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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