St. Jude strong in a weak market


  Recent Price
  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$48.49 - $24.98

Against today’s tenuous economic backdrop, few things are more important than sustaining growth of sales, profits, and cash flow. St. Jude Medical ($27; NYSE: STJ) should deliver on all three.

To be sure, the medical-device maker is not likely to match its pace of the last five years, when sales rose an annualized 19%, per-share earnings rose at a 20% clip, and cash flow increased at a 16% rate. But market-leading positions in key product areas, decent industry fundamentals, and rock-solid finances should support solid growth. Over the next five years, per-share profits are expected to grow 15% annually.

St. Jude shares have held up better than most, declining 33% this year, versus a loss of 49% for the average medical-equipment maker and a 42% decline for the S&P 500 Index. At 10.6 times estimated year-ahead earnings, the shares sell at a 15% discount to the average P/E ratio of 12.5 for health-care equipment stocks. St. Jude is a Focus List Buy and Long-Term Buy.

Diverse, growing operations
St. Jude focuses on devices for cardiac-rhythm management, cardiac surgery, and atrial-fibrillation therapy. The company also sells implantable neurostimulation devices used to manage chronic pain. St. Jude’s products are sold in more than 100 countries, and foreign sales accounted for 44% of 2007 revenue. The company faces challenging foreign-currency headwinds. In October, management initiated a new hedging program to help insulate sales and earnings from exchange-rate fluctuations.

With an expanding product line and rising market share, St. Jude seems well-positioned to deliver double-digit profit growth. Robust demand across several fast-growing and underserved markets should further bolster sales and earnings. In the nine months ended September, sales in the Asia-Pacific region and other emerging markets rose 22%. Demographics also favor St. Jude, as its products should appeal to an aging population.

St. Jude earns a Quadrix® Overall score of 89, with scores of 80 or higher in Momentum, Quality, Financial Strength, and Earnings Estimates. Based on Overall score, the stock is tied for third-highest among the 106 companies in the health-care equipment sector.

Consensus estimates project earnings of $0.61 per share in the December quarter, up from $0.54 in the year-earlier period. Full-year earnings per share should approach $2.31, up 25%. For 2009, per-share-profit estimates range from $2.41 to $2.73, with an average of $2.60, up 13%. 2009 revenue is expected to climb 9% to $4.75 billion. St. Jude has met or surpassed consensus profit estimates for 25 consecutive quarters, while revenue has topped expectations in the last eight quarters.

Capable of reaching $45
Considering St. Jude’s steady record of growth and favorable profit outlook, the stock seems undervalued at 12 times trailing earnings — a 56% discount to its 10-year average P/E of 27.

At a forward P/E of 17 and a trailing P/E of 20 — realistic figures given St. Jude’s growth prospects and peer earnings multiples — the shares would sell for around $43 to $45, implying at least 59% upside. An annual report for St. Jude Medical Inc. is available at One Lillehei Plaza, St. Paul, MN, 55117; (651) 483-2000;

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