Frustrating Boston Scientific Is Not What the Investor Ordered

NEW YORK (TheStreet) – Boston Scientific (BSX) continues to frustrate its shareholders. The shares peaked in January at $14.08 and have grossly underperformed its peers ever since.

Yet, the stock at around $12, is up 3% on the year to date.

While that 3% may seem respectable relative to the 3% gain of the Dow Jones Industrial Average, the shares have gotten punished their $14.08 head-fake in January. Investors have seen more than 12% of their wealth erode. During that same span, rivals Medtronic (MDT) and Abbott Labs (ABT) have posted gains of close to 9% each.

Making matters worse, shares of Boston Scientific, which trade at a price-to-earnings ratio of 45, are still not cheap. That 20 points above the industry aver P/E of 20, according to Yahoo! Finance.

With the medical device company delivering just 4% year-over-year revenue growth compared to, say, Johnson & Johnson (JNJ) , which is growing at 9%, there's still plenty of risk to the downside. Plus investors can buy Johnson & Johnson at a P/E of 20, lower their risk and enjoy a 2.8% yield compared to no dividend for Boston Scientific.

So for all of the reasons investors should jump into St. Jude Medical (STJ) , Boston Scientific should be avoided. With the stock trading around $12, it only takes one bad quarter or unfavorable product study to send these shares down to single digits. Only then will I recommend them as a buy.

Truth be told, I've always wanted to like this company. Its medical devices are used in a range of interventional medical specialties. There's no evidence that Boston Scientific -- although much improved -- has enough firepower to outgrow Medtronic and St. Jude. Both are making significant investments to secure their positions in the devices market.

Now that there are signs that device growth has stabilized, Boston Scientific still lacks the operational leverage to deliver on the bottom line. Its gross margin of 68% trails both Medtronic and St. Jude. And in terms of operating margin, Boston Scientific's 13% is half of not only Medtronic and St. Jude, but also Johnson & Johnson.

So where's the value?

The good news is that CEO Mike Mahoney has helped Wall Street forget the lingering problems that once kept investors at bay, including billions of wasted capital on acquisitions that never panned out. But I'm not ready to bet that this company can be an outperformed. That's exactly what is presumed by the stock price.

Investors are hoping for positive results from the company's Watchman Left Atrial Appendage (LAA) device. Designed to be permanently implanted in patients to treat blood clots, the Watchman LAA device has significant potential.

Still, the company's attempt to get it to market keeps running into one snag after another. The U.S. Food and Drug Administration, which recently called for a third panel meeting to review the device, isn't making it easy. With no guarantees that the device will ever get to market, investors are letting better opportunities pass them buy.

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 represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


TheStreet Ratings team rates BOSTON SCIENTIFIC CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate BOSTON SCIENTIFIC CORP (BSX) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income and weak operating cash flow."

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

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