2023-07-14 08:27:53 ET
Summary
- Boston Scientific's stock has experienced superior price action to both the healthcare technology index and the broad market, reflecting strong QoQ and YoY scale and margin performance.
- The company recorded Q1 revenues of $3.39bn, a 12% YoY increase, and a net income of $314mn, a 182.88% increase.
- Despite strong performance and a promising product pipeline, the firm's valuation nearing fair price leads to a rating of 'hold'.
Boston Scientific Corporation ( BSX ) is a Marlborough, Massachusetts-based multinational biomedical and biotechnology engineering firm, with expertise in medical device manufacturing used in interventional medical procedures, particularly across radiology, cardiology, neuromodulation, etc.
Through these activities, Boston Scientific has recorded Q1 revenues of $3.39bn- a 12.00% YoY increase-alongside a net income of $314.00mn- a 182.88% increase- and a free cash flow of $79.00mn, a 144.13% increase driven by increases across operating and investing cash flows.
Introduction
In the long run, Boston Scientific operates with a fivefold set of strategic objectives encompassing a focus on transformative products, driven by employee retention and engagement, enhanced innovation capabilities, ESG inclusionary policy, and high-quality products, reducing potential for recall and remaining an efficient organization.
These ideas feed into Boston Scientific's product development pipeline, which emphasizes a proactive quality assurance culture, nimble and efficient organization, consistent and stable performance capabilities, and accountable compliance and auditing practices.
While Boston Scientific's core capabilities, supply chain, and product pipeline remain extremely promising, the firm's long-run rally and valuation nearing fair price lead me to rate the company a 'hold'.
Valuation & Financials
General Overview
In the TTM, Boston Scientific's stock-up 42.25%- has experienced superior price action to both the healthcare technology index ( DWHC )- up 0.32%- and the broad market, as represented by the S&P 500 ( SPY )- up 17.12%.
I believe that this dynamic reflects strong QoQ and YoY scale and margin performance on the part of Boston Scientific, further enhanced by the inelastic demand for Boston Scientific's healthcare products.
Comparable Companies
The wide range of biomedical and biotechnology products leads to inherent fragmentation in the industry. As such, rather than direct competitors, Boston Scientific remains most comparable to similarly sized biomed and biotech firms with adjacent operations. This includes Becton, Dickinson and Company ( BDX ), a New Jersey-based medical technology firm, Edwards Lifesciences ( EW ), a Californian company specializing in heart valves and hemodynamic monitoring, and DexCom ( DXCM ), a San Diego-based glucose monitoring manufacturer and distributor.
As demonstrated above, Boston Scientific has experienced the second-best YoY price action alongside the second-worst quarterly price action, largely as a result of reduced upside due to the prior rally. Despite this, relative to peers, Boston Scientific remains well-valued as pertains to multiples-based value and growth capabilities.
For example, Boston Scientific retains the second-lowest trailing and forward P/E ratio of the peer group. Alongside the second-lowest P/S, P/CF, and P/B, Boston Scientific demonstrates appropriate value across all three financial statements.
Furthermore, as evidenced by the second-highest ROA, the second-lowest PEG ratio, and reinvestment capabilities as driven by a very strong balance sheet-with the second-best P/B, BV/share, and debt/equity-Boston Scientific is well-positioned to maintain its current growth trajectory, though I fear much of this growth has already been priced-in.
Valuation
According to my discounted cash flow analysis, at its base case, the net present value of Boston Scientific should be $52.97, meaning, at its current price of $52.79, the firm is fairly valued.
My model, calculated over 5 years without perpetual growth baked in, assumes a discount rate of 8%, owing to Boston Scientific's overall low debt levels and relatively low equity risk premium. Additionally, extrapolating a continuation of growth trends, with a revenue growth rate of 7%, slightly lower than the 5Y historic average growth rate of 7.36%, itself a conservative benchmark which was weighed down by -7.66% outlier growth in 2020.
Alpha Spread's multiples-based relative valuation tool actually calculates an undervaluation of 21%, estimating the fair price of the stock to be $66.36.
That said, Alpha Spread's tool is weighed down by outlier companies with higher multiples, such as Intuitive Surgical ( ISRG ) and IDEXX Laboratories ( IDXX ).
As such, using a weighted average of my DCF and Alpha Spread's relative valuation, skewed toward my DCF, the fair value of Boston Scientific is $55.57, with the stock being undervalued by ~5%
Boston Scientific Continues to Lead All Verticals, Supporting Underlying Scale & Margin Growth
At the core of Boston Scientific's growth capabilities remains the firm's strong product pipeline, promising superior biomedical performance and commanding a stronger moat. This production superiority is manifested by Boston Scientific's leadership in interventional cardiology, with best-in-class stent systems and valve systems corroborating the idea of a better product for consumers. Furthermore, with items such as the Sentinel Cerebral Protection System, the only available product in the US providing embolic protection against TAVR (Transcatheter aortic valve replacement) related stroke, Boston Scientific distinguishes itself and supports the development of an increasingly loyal consumer base.
When combined with Boston Scientific's supply chain strength and international presence, the firm's ability to innovate is enhanced and becomes increasingly resilient. Boston Scientific's vertically integrated supply chain not only secures product supply, in turn supporting demand retention, but also serves to improve collaborative R&D capabilities, attracting talent from around the world alongside diverse perspectives and education that comes with. Furthermore, this strategy supports Boston Scientific's ability to expand geographically in the long run.
Wall Street Consensus
Analysts provide a more positive view than my own, estimating an average 1Y price target of $59.07, representing a 12.59% increase.
The minimum estimate of analysts is more in line with my own valuation, projecting a price of $55.00, representing a 4.84% increase.
I believe analyst bullishness is largely a product of historical trends and the assumption that historical growth will be sustained. While there is no major catalyst to indicate a price collapse for Boston Scientific, I believe the firm's YoY rally and high valuation make the situation increasingly fragile and uncertain for investors.
Risks & Challenges
Inability to Sustain Growth or Poor Guidance May Lead to Price Collapse
As aforementioned, Boston Scientific's high stock price growth is underpinned by assumptions of continued growth. Although Boston Scientific is reporting steady guidance and operates without obvious pitfalls, any black swan events or unforeseen headwinds that may reduce profitability or scale growth may lead to irreversible downward pressure on the stock price, which may seize to operate on the assumption of built-in growth.
Boston Scientific's Success is Undergirded By Employee Retention & Continuous Innovation
Since Boston Scientific fundamentally sees its best-in-class product mix as its primary growth driver, the firm is dedicated to outsized investment in the continuous improvement and procurement of such products. However, to innovate at such a rapid pace, Boston Scientific must retain top talent and invest heavily in R&D. This comes with the price of increased capex and opex for labour and innovation expenses, which may lead to diminished cash flows and do not guarantee returns.
Conclusion
Going forward, although Boston Scientific remains operationally sound with an extremely strong product pipeline, the firm trades near fair value and may be sensitive to growth or guidance downgrades, thus remaining a 'hold'.
For further details see:
Boston Scientific Remains Operationally Sound But May Have Limited Upside