I've always wanted to like this company. In fact, there was a point when I believed Boston Scientific was one of the best turnaround candidates in the med-tech sector, given that its medical devices are used in a range of interventional medical specialties. But uncertainty about the company's growth potential kept me at bay.
It's true that CEO Mike Mahoney has advanced the company past some lingering problems. And there are signs that device growth has stabilized and restored the strength of this operation. There's still, however, residue from billions of dollars spent on acquisitions that have produced little-to-no growth, which can't be ignored. The Street, meanwhile, has taken a different stance.
Despite this track record, Boston Scientific stock has been one of the best performers in the sector, soaring well over 100% in the trailing twelve months. Once again the Street is showing strong confidence that this company can outperform in 2014. I don't mind betting on a long-shot every now and then. But this isn't the first time these bets were placed. It wasn't long ago when this company was considered a "sure thing."
What's more, when compared to the performances of rivals like Stryker (SYK) and Medtronic (MDT), I haven't found anything in Boston Scientific's recent earnings reports to support such optimism. Instead, it's been the strong performance of the entire sector and the idea of "tandem-trading" that has lifted Boston's shares to comparable levels. But can it last?
On Tuesday, management will have a chance to answer this question when Boston Scientific reports fourth-quarter and full-year earnings. The Street will be looking for 13 cents in earnings per share on revenue of $1.83 billion, which would represent flat year-over-year growth.
With revenue growth rate expected at less-than 1%, this means you can forget about any organic growth. Investors still seem overly encouraged by the progress shown in the October quarters. I'm willing to grant there were some moderate improvements. But let's not pretend it was anything extraordinary. The company only posted in-line results.
In that regard, if Tuesday's numbers come in as expected, you would have to consider it a relative disappointment, given that Boston Scientific was able to produce 4% organic growth in October. This quarter should be seen as a backward step, which causes me to question how investors can be so quick to bet on this turnaround.
I'm not saying all is lost with this company. Turnarounds are not uncommon. But what bothers me with this story is that despite management's efforts with cost-reduction, it was discouraging that operating income declined in the October quarter.
Plus, management must find ways to secure more market share in key areas, one being the drug-coated stent business. Although the devices business has done well against both St. Jude Medical (STJ) and Johnson & Johnson (JNJ), another 6% decline in stent revenue has to be a disappointment, especially since Johnson & Johnson has exited that market.
And this goes back to my earlier point about the Street wanting again to believe in this story. Growth in stents was the popularly cited catalyst several years ago when Johnson & Johnson decided it was no longer interested in pursuing the market. This left Boston Scientific with a wide open opportunity. It just couldn't capitalize.
To that end, given the company's plans to cut its workforce by as much as 6%, this brings into question whether Boston Scientific can and/or will invest in resources to grow where it needs to, much less expect to steal share from better-run rivals like Johnson & Johnson. The bottom line may be improved, but eventually without growth, that, too, begins to diminish.
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.