BSX Upgraded to Outperform

Recently, we upgraded Boston Scientific Corporation (BSX) to Outperform with a target price of $7.75.

Boston Scientific reported an EPS of 10 cents during the second quarter of fiscal 2011 compared to 6 cents in the year-ago period. However, after considering certain adjustments (other than amortization expense), the adjusted EPS came in at 12 cents, beating the Zacks Consensus Estimate of 8 cents and the year-ago quarter’s 6 cents.

Revenues increased 2.4% year over year to $1.975 billion during the quarter, surpassing the Zacks Consensus Estimate of $1.936 billion. However, excluding the impact of foreign currency and sales from divested businesses, net sales remained unchanged.

Boston Scientific is a leading player in the CRV industry and has made significant progress in its ‘Priority Growth Initiatives’ through some recent acquisitions and several internal growth programs. Technologies from these initiatives, to be commercialized in 2011 and 2012, are integral to the realignment of the company’s portfolio for future growth.

After several quarters, growth in the Cardiovascular portfolio came as a pleasant surprise. While the launch of Ion in the US helped the company increase its share in the DES market, the launch of Promus Element is now expected before the original timeline of June 30, 2012.

The company is leaving no stone unturned to keep itself on the growth track. These include technological developments through acquisitions, restructuring program, debt reduction and a new $1 billion share repurchase program.

The restructuring program will involve standardizing and automating certain processes, relocating selected administrative and functional activities and other activities to increase overall productivity. This program is expected to reduce annual pre-tax operating expenses by $225-$275 million exiting 2013 and a part of this saving will be invested in the business to drive growth going ahead.

The steps will begin in the third quarter, to be completed by the end of 2013 and likely to result in the reduction of 1,200 to 1,400 positions globally. During the Analyst Day in 2010, the restructuring program had been discussed and based on the recent one, the company plans to execute one among several steps to achieve its previously targeted savings of $650-$750 million (to materialize in 2012-13).

Having established a strong foothold in the US and Europe, Boston Scientific is looking at establishing its presence in the emerging markets of Brazil, India and China that recorded 20% growth during the quarter and holds immense potential. The company announced an additional investment of $150 million in China over the next 5 years.

The company has decided on a number of steps to expand its presence in China that includes setting up of manufacturing operations, building a physician training center and increasing the headcount to more than 1,200 employees (including the increase in sales force to 700 people). The company expects to increase global market share by tapping the huge potential in emerging markets.

However, the CRM market in the US, which declined in high single digits during the reported quarter, continues to be the primary area of concern. The company expects the global CRM market to show a slightly negative growth in the near term and then return to modest growth in low single digits within the next couple of years.

A further deterioration in the CRM market could negatively impact the company’s top line. Additional challenges concerning the company are softness in procedural volume, delays in new products and competitive product launches. The company faces tough competition from players like Medtronic (MDT) and St Jude Medical (STJ), among others.

MEDTRONIC (MDT): Free Stock Analysis Report

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