Why St. Jude Medical Has Become a Must-Own Medical Device Stock

NEW YORK ( TheStreet) – With Edwards Lifesciences ( EW) and Boston Scientific ( BSX)   trading at near 52-week highs, there aren't many bargains left in medical devices stocks. But St. Jude Medical ( STJ) , after a recent 10% pullback, can offer investors exceptional value while also producing the growth Wall Street craves.

The stock, at close to $65, is up close to 5% on the year to date, trailing the medical devices sector's 7.56% gain, according to Morningstar. But since St. Jude hit $71.90 on July 7, the company has lost 10% of its value. I don't believe this decline was justified.

St. Jude now offers appealing growth and value qualities in an otherwise bloated devices sector.

The industry's price-to-earnings ratio stands at 25.33, according to Yahoo! Finance. Yet, both Boston Scientific and Edwards are trading at multiples of 45 and 35, respectively. St. Jude, meanwhile, carries a ratio of 25.

More important to consider, especially in light of the 10% pullback, is these shares are trading on a forward multiple of 14, based on estimates of $4.32, according to Yahoo! Finance. This compares to a forward multiple of 26 for Edwards. Not to mention, St. Jude outperforms Edwards in operating margin, which suggest management is able to do more with the revenue it generates.

In other words, Wall Street isn't ready to credit management for some of its restructuring and value-building efforts, many of which should fuel long-term growth.

The last time I talked about St. Jude, these shares traded at around $68. I told you to wait for a pullback. Now it's time to pull the trigger. At current levels, St. Jude stock should trade at around $75 in the next 12 to 18 months, gaining more than 15%. It is still below analysts' highest price target of $81, according to Yahoo! Finance.

St. Jude recently completed the acquisition of NeuroTherm, a privately held company that specializes in chronic pain devices. Not only did this move enhance St. Jude's pain solutions portfolio, St. Jude is now the only name in the industry with capabilities in radiofrequency ablation (RFA) for spinal cord stimulation and can treat spinal pain.

Radiofrequency ablation is a procedure that uses electrical current produced by radio waves to help minimize pain signals in targeted areas. This acquisition for NeuroTherm, while not a game-changer based on its $200 million cash value, is precisely the key thing St. Jude needs to differentiate itself and help increase market share in a highly competitive environment.

St. Jude is already holding its own against both Medtronic (MDT) and Boston Scientific. With 1.5 billion patients across the globe suffering from chronic pain, RFA has the potential to service of growing population looking for interventional pain therapy. Given that NeuroTherm already services people in 65 countries, St. Jude should become the go-to player for minimally invasive RFA procedures.

At some point, larger rivals such as Johnson & Johnson (JNJ) or even a smaller name (according to market cap) like Intuitive Surgical (ISRG) will want or need to offer something similar. It still remains a relatively untapped market. But it won't be forever.

All told, there is plenty of value here in St. Jude for both investors and rival companies looking for growth via a merger or acquisition. After the 10% pullback, the risk/reward ratio now favors buying the stock and holding for the long term.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

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


TheStreet Ratings team rates ST JUDE MEDICAL INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ST JUDE MEDICAL INC (STJ) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and notable return on equity. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

You can view the full analysis from the report here: STJ Ratings Report

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