Boston Scientific’s Return to Profit is More Bitter Than Sweet

Medical device maker Boston Scientific (BSX) reported third quarter earnings which showed the company swung back to a profit. Net income came in at $200 million or 12 cents per share after backing out one-time charges, which obviously compares favorably to the period a year ago where they lost $62 million as costs related to acquisition dragged down the results. Consensus earnings estimates were calling for slightly better results of 14 cents. Sales increased by 3% to $2.03 billion but this was a shade under analysts expectations. In addition to the company missing on the top and bottom lines, management also reduced earnings and sales guidance for the rest of the year.

For fiscal 2009, earnings are now expected to come in the range of 43 to 48 cents down from the 47 to 53 cent (adjusting for one-time events) estimates the company offered in July. As for revenue, Boston Scientific now expects $8.134 billion, which is less than the July guidance by $100 million. After the worse than expected results and the lowering of guidance for the rest of the year, the stock is trading off nearly 20% on Tuesday. Furthermore, according to Thomson Reuters, the CEO has said that US health care reform could be very damaging to the medical device industry and would substantially increase his company’s tax liability. He said that the proposed legislation would lead to drastic reductions in research and development and could result in 1000 to 2000 job cuts. Obviously, this is yet another reason for the market’s sharp selloff in Boston Scientific.

We are affirming our neutral or Fairly Valued stance on Boston Scientific as of the third quarter earnings report. The stock has sold off quite a bit, but there it has not yet fallen to a level that we would consider attractive. Unfortunately, BSX’s growth in medical stents has slipped recently and we expect sales will continue to be sluggish at least until they release the next generation Promus Element later this year. Thus far BSX has failed to increase market share appreciably while one of their primary competitors St. Jude Medical (STJ) struggles.

At this point, with the potential of costly regulation coming down the pike, we are not going to recommend these shares barring a further reduction in price. Based on our methodology, the fundamentals support a price range of $6 to $8, but we always try to steer clear of companies that are being threatened by pending government intervention. Government actions are always difficult to predict and even harder to incorporate into a model, so we generally try and find investment alternatives that do not have this cloud hanging over them.

Boston Scientific’s Return to Profit is More Bitter Than Sweet

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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