Take Heart In St. Jude

11/22/2010


  Recent Price
$39
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
13
  Shares (millions)
330
  Long-Term Debt as % of Capital
32%
  52-Week Price Range
$42.87 - $34.00

Medical-device maker St. Jude Medical ($39; STJ) has delivered annualized growth of more than 12% for both sales and per-share profits over the last five years, with double-digit profit growth in each of the last 15 quarters.

Yet the stock, down 10% from its April high on concerns regarding slowing sales growth in the core cardiac-rythym-management (CRM) business, trades at 13 times trailing earnings, 22% below the three-year average P/E and 21% below the average health-care equipment stock in the S&P 1500 Index.

Free cash flow has trended higher over the past year as operating profit margins have widened. Earning an Overall score of 97, St. Jude is a Long-Term Buy.

Business breakdown

St. Jude’s CRM unit generated 59% of revenue in the last four quarters. The unit produces implantable cardioverter defibrillators for hearts that beat too quickly and pacemakers for hearts that beat too slowly. In October, management trimmed its annual growth outlook for the overall CRM market to 3%, down from its previous view of 4% to 6% growth.

The $12 billion CRM market is fairly mature and highly competitive. St. Jude controls more than one-fourth of the CRM market, behind only Medtronic ($34; MDT), and appears to be gaining market share. By cranking out new products, St. Jude commands higher average selling prices in an industry plagued by price erosion. The CRM unit delivered nearly 10% annualized revenue growth from 2006 through 2009, and that pace has held up so far in 2010.

St. Jude also operates a cardiovascular business (20% of 12-month sales) that sells vascular-sealing devices, diagnostic guidewires, catheters, and heart valves. The atrial-fibrillation unit (14%) produces devices that diagnose and treat abnormal heart rhythms. The neuromodulation segment (7%) makes implantable devices that send electric current or release drugs to specific nerve sites. Neuromodulation produced less than 1% of St. Jude’s revenue in 2005 but now represents the company’s best growth outlet, with sales up 14% this year.

Over the last five years, St. Jude has plowed nearly 15% of revenue into research and development. A flurry of new products and recent acquisitions have given St. Jude access to several new markets, including stented tissue valves and intravascular imaging. Collectively, the new products should generate strong long-term growth.

The new devices have already begun to ease St. Jude’s reliance on CRM products, which provided two-thirds of revenue in 2005. The company is developing a device to treat certain kinds of migraines, potentially offering relief to 20 million sufferers. European regulators could approve the device next year.

In October, St. Jude projected 2010 per-share profits of $2.98 to $3.00, representing growth of at least 23% and up from previous guidance of $2.86 to $2.91. For 2011, Wall Street expects per-share-earnings growth of 8% on a 6% sales gain. An annual report for St. Jude Medical Inc. is available at One Lillehei Plaza, St. Paul, MN, 55117; (651) 483-2000; www.sjm.com.

ST. JUDE MEDICAL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '10
0.72
vs.
0.59
+ 7%
39.52
-
34.25
14 - 12
Jun '10
0.79
vs.
0.63
+ 11%
42.87
-
34.00
16 - 13
Mar '10
0.75
vs.
0.58
+ 11%
41.76
-
36.73
17 - 15
Dec '09
0.64
vs.
0.60
+ 6%
38.97
-
31.66
16 - 13
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2009
4.68
2.43
0.00
41.96
-
28.86
17 - 12
2008
4.36
2.31
0.00
48.49
-
24.98
21 - 11
2007
3.78
1.85
0.00
48.10
-
34.90
26 - 19
2006
3.30
1.50
0.00
54.75
-
31.20
37 - 21
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
83
82
93
78
84
34

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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