BSX - Boston Scientific: Continued M&A Drives More Growth

2024-01-10 18:01:36 ET

Summary

• Boston Scientific Corporation has seen a steady recovery over the past decade, reaching all-time highs of $58 per share.
• The company has achieved solid middle- to higher-single digit organic revenue growth numbers, outperforming the market.
• Boston Scientific has made acquisitions to drive growth, including the recent $3.4 billion acquisition of Axonics.
• After a re-rating, Boston Scientific Corporation shares look a bit extended here.

Shares of Boston Scientific Corporation ( BSX ) really deserve their share of respect. The company has seen a rather turbulent history, as a single-digit stock in the year 2000 peaked in its forties in 2004, only to trade in the single digits again all the way up to 2013.

This was largely the result of the overhang of an expensive $27 billion deal for Guidant, but the business has seen a steady recovery over the past decade to fresh all-time highs around $58 per share here. This comes as Boston Scientific has seen a real resurrection over the past decades, aided by organic growth, although shares look a bit extended here.

Improving The Positioning

Over the past decade , Boston Scientific has steadily advanced the business. It has essentially doubled sales from $7 billion to nearly $14 billion, although that came at the expense of about 10% dilution over this period of time.

Growth has been driven by a combination of organic growth and dealmaking, which complicated the finances, at least if we blindly look into the GAAP numbers. With its growth, Boston Scientific has become more diversified as it reports its results across two major categories.

Cardiovascular solutions make up over 60% of sales, dominated by the cardiology business and to a smaller extent the peripheral interventions business. This is complemented by the medsurg business, comprised out of endoscopy, urology and neuromod markets. In terms of geographies, it is the U.S. that makes up 60% of sales, complemented by a substantial EMEA and APAC segment, and to a smaller extent a presence in the Latin America markets.

What is impressive is that despite the widespread activities, the company has been outperforming the market in which it competes, posting solid middle- to higher-single digit organic revenue growth numbers.

About The Valuations

In February of last year, Boston Scientific grew reported sales by 7% to $12.7 billion, with growth seen in all major product segments as well as geographical divisions. The company posted solid GAAP operating profits of $1.65 billion, and net earnings of just $642 million, equal to $0.45 per share. Adjusted earnings were reported at much higher levels of $1.71 per share after no less than ten adjustments were made to GAAP earnings.

While I am happy to adjust for amortization and intangible asset impairment charges, some costs are really part of the ordinary course of business, including restructuring, litigation and acquisition-related charges. This comes as M&A is part of Boston's strategy, with adjusted earnings posted at $2.46 billion, translating into very decent margins.

Alongside the release of the 2022 results, the company guided for a solid 7% organic sales growth in 2023, with adjusted earnings seen at around $1.90 per share.

After a strong first quarter earnings report, the company upped the full-year organic sales growth number to 9%, with adjusted earnings seen at around $1.93 per share. The guidance was hiked again in a rather convincing move alongside the second quarter earnings release . Full year organic sales were now seen up 10-11%, with adjusted earnings seen at a midpoint of $1.98 per share.

While it has been rather quiet on the M&A front, after a few bolt-on deals announced late in 2022, the company announced an $850 million deal to acquire Relievant Medsystems in September. The deal is set to add $70 million in annual sales, revenues which are expected to grow at a >50% rate in 2024, adding to the capabilities and growth profile of Boston Scientific.

In October, Boston Scientific released third quarter results , now seeing full year organic sales around 11% with adjusted earnings seen at around $2 per share. This means that a $14 billion sales run rate is firmly in place.

Valuation Thoughts

With a net debt load of $8.0 billion as of the third quarter, the market value of the firm is rapidly approaching a hundred billion dollars here. The 1.47 billion shares grant the company an $85 billion equity valuation at current highs of $58 per share, for a $93 billion enterprise valuation.

This values the operations at roughly 6.5 times sales, a somewhat higher multiple, yet >10% organic growth on this scale is quite an achievement. Nonetheless, earnings expectations are quite high here, as the very adjusted earnings numbers of $2 per share work down to a near 30 times earnings multiple. Leverage is not a real issue at just over 2 times, with EBITDA trending close to $4 billion.

It is the strong organic growth which gave management confidence to pursue the acquisition of Relievant in September, and now a larger deal at the start of 2024 as well.

Another, But Bigger Deal

At the start of 2024, Boston Scientific announced the acquisition of Axonics, Inc. ( AXNX ) , a medical device company which focuses on urinary and bowel dysfunction. With a $71 cash offer made for Axonics, the purchase price comes in at $3.4 billion, equal to about 4% of the valuation of Boston Scientific itself.

The product of Axonics is designed to deliver the so-called sacral neuromodulation therapy ((SNM)), a minimally invasive procedure used in the treatment of overactive bladder and fecal incontinence, conditions which impacts (tens) of millions of patients. With a $366 million revenue contribution seen in 2023, the sales multiple of about 9 times marks a small premium compared to Boston Scientific, yet its sales grew by over a third.

Investors in Boston have hardly reacted to the deal, despite a relatively modest 20% premium, as the near-term earnings impact is immaterial, while leverage will tick up towards 3 times EBITDA.

A Word Of Caution

Boston Scientific has seen huge gains in 2023, backed up by strong organic growth, while the sector at large has seen a tougher year, yet I feel that the risk-reward here is not as great.

While Boston Scientific Corporation has really deserved more credits over time, it feels as if the shares have traded a bit ahead of themselves, making me cautious to chase the shares here at current highs and after an apparent interesting bolt-on deal for Axonics.

This comes on top of the improved performance of the core business, driven by much favorable research results and FDA rulings. However, a 30 times current adjusted earnings number is a bit too demanding for me to get too upbeat here, although credits are due where they are due.

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