Earnings Scorecard: Boston Scientific (BSX)

Boston Scientific (BSX) reported its second quarter 2010 results on July 20 and increased its earnings estimates for fiscal 2010, based on its confidence to create a strong global position with successful product launches and further acquisitions and investments in the emerging markets.

Second Quarter Highlights

Boston Scientific reported adjusted EPS (excluding goodwill impairment-related credits; restructuring-related charges) of 12 cents, which surpassed the Zacks Consensus Estimate of 3 cents. The company reported earnings of 20 cents in the year-ago period. Without adjusting for one-time items, Boston Scientific reported EPS of 6 cents.

Revenues for the quarter declined 7% year-over-year to $1.93 billion, due to the cardiac rhythm management (CRM) shiphold and product recalls in the first quarter of 2010.

The Endoscopy and Women’s Health businesses grew 8% and 4% year over year, respectively and the Neuromodulation segment reported a flat year-over-year growth in the second quarter 2010. However, Cardiovascular group and Neurovascular segment posted a decline of 9% and 5% in revenues.

Total Cardiovascular group sales included a decline of 13% year-over-year in CRM sales. However, CRM is experiencing a recovery from the last quarter’s product recalls hangover attributable to its exceptional sales execution team. Neurovascular segment’s sales declined 5% year over year.

Boston Scientific maintained its leadership in the drug-eluting stent (DES) market with market share of 46% and 38%, for the domestic and global market, respectively.

Boston Scientific provided revenue and EPS guidance range of $1.850 billion – $1.925 billion and 10 cents – 13 cents, respectively, for the third quarter 2010. For fiscal 2010, the company lowered the upper end of its net sales guidance range to $7.6 billion – $7.9 billion from the previous range of $7.6 billion – $8.0 billion. However, raised its adjusted EPS guidance range to 54 cents – 62 cents from the previous guidance of 50 cents – 60 cents.

Agreement of Analysts

The estimate revision trends depict mixed trends for the company’s earnings in the forthcoming period. For the current quarter, over the last 30 days, 3 of the 18 analysts covering the stock have made downward revisions and 3 have made upward revisions. For the next quarter, 4 out of 19 analysts, made downward revisions while 5 made upward revisions, over the last 30 days. The Zacks Consensus Estimates for the third quarter and fiscal 2010 are 6 cents and 31 cents per share, respectively.

The company continues to face pricing pressures from the worldwide market, especially in CRM and DES and also encounters challenges related to weakening euro, affecting the company’s revenue growth. This leads to uncertainty as to the time, when the pricing scenario will be in favor of the company.

In addition, the worldwide ICD market share decreased five percentage points to 22.1%, in the second quarter. However, the ICD ship hold and product removal actions lowered the revenue growth rate by approximately 300 basis points or $62 million in the quarter compared with guidance estimate of $127 million due to the strong execution of Boston Scientific’s stop shift recovery plan The total ship hold impact is now expected to be $225 million, versus previous expectations of $300 million.

Estimates for fiscal 201 Boston Scientific are on the upswing, reflecting the company’s efforts to recuperate the market share, despite the product recalls and ship holds. Out of a total of 22 analysts currently covering the stock, 14 have raised their estimates for fiscal 2010 over the last 30 days with no negative revisions. But for the fiscal year 2011, there was again a mixed trend. Over the last 30 days, 6 out of 22 analysts made upward revisions while 4 analysts moved in the opposite direction.

The optimism among the analysts reflects improved earnings visibility, encouraging growth prospects in the company’s core ICD business despite the ship holds seen in the earlier quarter. The company intends to focus on other areas such as non DES and Non CRM businesses and acquisitions. It has laid down new strategic plans, aimed at controlling the expenses and strengthening the bottom line.

In addition, the launch of Promus Element and Taxus Element is expected to reinvigorate Boston Scientific’s position in the DES market during the second half of the fiscal year 2010. These initiatives will help the company to re-establish its foothold in the CRM market and in emerging countries as well.

Furthermore, Boston Scientific has strengthened its capital structure with no debts for three years. It plans to invest in selected acquisitions and other technology investments to meet its targeted capital structure goals.

Magnitude of Estimate Revisions

The magnitude of revisions remained somewhat consistent following the second quarter results. Overall, estimates for the next two quarters remained constant at 6 cents and 10 cents, respectively.

Our Recommendation

Boston Scientific is targeting strategies such as increase in the level of spending related to Selling and Administration, over the second half of the year as well as makes augmented investments for top line growth. It seeks growth through expansion in the emerging markets.

Boston Scientific’s proactive steps, which include divesting assets, cost reduction initiatives, repayment, and restructuring of debt have stabilized the company’s liquidity, which was a matter of concern for the investors in the past. In addition, going into FY10, the analysts are optimistic that management’s renewed focus on operating leverage will be reflected in the company’s results, lending an upside potential to their forecasts and resulting in improving sentiment on the stock.

This boosts our positive sentiment for Boston Scientific and reflects the potential for significant upward pressure on the stock. We have a Neutral recommendation on the stock which corresponds to the Zacks # 3 Rank (Hold).

About Earnings Estimate Scorecard: Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These Earnings Estimate Scorecard articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education.

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