2023-05-01 12:45:32 ET
Summary
- Boston Scientific is doing a lot of the right things as evidenced by a strong Q1 report featuring impressive in-house growth.
- With a mid-20s P/E, shares match long-term valuation metrics.
- The technicals appear strong, but buying on a pullback to a test of support is a better play than purchasing today.
Medical device stocks have been an outperforming niche of the Health Care sector in the last six months. While the broad sector has been a laggard lately, momentum investors have swept into the higher-return potential cyclical spot of this defensive area.
Boston Scientific ( BSX ) topped earnings expectations last week, but I see shares near fair value today while the technical chart is stretched after a massive run and breakout. Buying a dip into the $40s could be a more prudent play for growth investors.
IHI Medical Device ETF: Big Alpha Last 6 Months
According to Bank of America Global Research, BSX develops, manufactures, and markets medical devices that are used in interventional cardiology, peripheral interventions, vascular surgery, electrophysiology, neurovascular intervention, oncology, endoscopy, urology, gynecology, and neuromodulation.
The Massachusetts-based $74.9 billion market cap Health Care Equipment & Supplies industry company within the Health Care sector trades at a high 88.8 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.
BSX issued a strong Q1 report on April 26. Per-share operating earnings were $0.47, topping forecasts by $0.04, while the firm beat on revenue, too. Upbeat guidance was music to the Street’s ears. But the stock did not react well, trading lower intraday after a gap up. Some profit-taking was perhaps to be expected after a stout rally over the last several months. Still, with organic growth of 14% and a full-year revenue outlook that rose from +6-8% to +8-10%, the growth trajectory is intact.
Capital allocation plans are important for the stock, and so far, they have been disciplined, but there have been whispers that the firm could be on the hunt for Shockwave Medical, but UBS says that’s unlikely . I would rather BSX focus on its high organic growth avenues.
On valuation , analysts at BofA see earnings rising at a double-digit rate through 2025, climbing from near $2.00 this year to nearly $2.50 by 2025. The Bloomberg consensus forecast is about on par with what BofA forecasts. No dividends are expected to be paid, however BSX is free cash flow positive.
Value investors might shy away from the stock’s mid-20s operating and GAAP price-to-earnings ratios, but the forward PEG ratio is not extreme by any means at 2.28 versus a sector median of 2.12. BSX’s 5-year average PEG is 2.24. The firm’s price-to-sales ratio is also at a modest premium to the sector and its usual multiple. With that in mind, I see the stock as near fairly valued here.
Boston Scientific: Earnings, Valuation, Free Cash Flow Forecasts
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Wednesday, July 26 with a shareholder meeting this coming Thursday that could bring about some volatility.
Corporate Event Risk Calendar
The Options Angle
What I noticed following last week’s earnings report was a slew of EPS upgrades. According to data from Option Research and Technology Services (ORATS), there have been a whopping 18 earnings upgrades versus just a pair of downgrades. So, the current $0.49 estimate for Q2 per-share profits, about 12% higher compared to the same quarter a year ago, may have upside potential as we head further into the quarter.
As it stands, BSX is a low-volatility stock, so the options suggest small moves on this stable name. ORATS reports implied volatility of just 19.1% after last week’s earnings beat and positive stock price reaction. As such, just a 3.1% earnings-related move is priced into the July earnings report.
BSX: Significant Upward EPS Revisions, Low Volatility Implied
The Technical Take
I last looked at BSX in October of last year, so it’s time for a refresh on the chart. The bulls have enjoyed a calm ride higher amid a shaky macro backdrop. I initiated coverage (buy) on the company nearly a year ago, and it took a while for the upside to materialize. In the long-term weekly chart below, you can see that shares broke out above resistance in the $46 to $47 area after taking off starting in Q4 2022.
Volume has been strong in recent weeks on the upside move, and the RSI momentum indicator at the top of the chart helps confirm the rally. Also notice how the 200-week moving average is upward-sloping, as is the 40-week moving average (which corresponds to the 200-day moving average). Technically, the stock could be a bit stretched, so I like a ‘buy the dip’ play to the upper $40s where significant support should come into play at old resistance.
BSX: Bullish Breakout, But A Pull Back To Support Is Possible
The Bottom Line
I am downgrading my buy rating to a hold on BSX. The valuation looks fairer today while the technicals have turned a bit stretched.
For further details see:
Boston Scientific: Downgrading To Hold After A Major Rally, Near Fair Value