When it comes to investing, the location of a property matters just as much as its inherent value. Similarly, studies have shown that a stock’s sector performance plays a significant role in determining its overall movement. This holds true for Boston Scientific Corporation (NYSE:BSX), a leading med-tech company. While the company continues to perform well and offers unique growth drivers, the overall med-tech sector has been struggling as of late.
I believe that Boston Scientific has the potential to achieve high single-digit long-term revenue growth fueled by opportunities such as pulsed field ablation, the Watchman left atrial appendage closure device, heart valves, peripheral intervention, endoscopy, prostate health, pain, and endoscopy. However, the market’s perception of this growth remains uncertain. If the sector continues to experience a decline in valuation, Boston Scientific may still offer upside potential, although it might not be sufficient to attract some investors.
Strong Q3 Performance, Meeting Expectations
Boston Scientific’s third quarter report showcased strong performance, although the results were in line with expectations. The company exceeded operating income estimates by $0.01 per share, benefitting from a lower tax rate. Despite raising guidance for Q4 ’23, the market had already factored in robust expectations.
The company achieved approximately 10% organic revenue growth, surpassing the average sell-side estimate by almost 2%. While a few product lines fell slightly short of revenue expectations (such as Interventional Cardiology Therapies and Neuromodulation), others performed exceptionally well, including Cardiac Rhythm Management (CRM), Electrophysiology, Peripheral Interventions, Endoscopy, and Urology.
Gross margin declined slightly, primarily driven by forex headwinds, while operating earnings rose by 17%, including amortization. The company’s focus on margin expansion resulted in a 100-basis-point increase in operating margin (amortization included) and a 50-basis-point increase in margin without amortization.
Expanding the Growth Arsenal
Boston Scientific continues to fortify its long-term growth story through recent trial read-outs and strategic acquisitions. At the recent TCT meeting, the company presented the IDE trial data for its drug-coated balloon, Agent, used in the treatment of in-stent restenosis. The results showed favorable outcomes compared to angioplasty, presenting a significant market opportunity for the company.
Additionally, the acquisition of Relievant Medsystems for $850 million added the Intracept intraosseous nerve ablation system to Boston Scientific’s portfolio. The system has already received FDA approval and Medicare reimbursement, addressing chronic lower back pain.
Furthermore, Boston Scientific highlighted other growth opportunities, such as TheraSphere for brain and prostate cancer, SpaceOAR in prostate cancer treatment, renal denervation, and mitral and tricuspid valve repair/replacement. These areas represent potential future growth markets for the company.
The recent Investor Day did not bring significant new insights or alter my thesis. However, it did reassure the market regarding the company’s growth prospects, margin expansion, and free cash flow improvement. I anticipate a long-term revenue growth rate above 8%, driven by various growth drivers such as pulsed field ablation therapy, Watchman, and TAVR.
The company’s strong financial performance is expected to translate into high-teens free cash flow margins over the next five years and low-20s in the subsequent years. Boston Scientific’s growth-based EV/revenue multiple will depend on med-tech sector valuations. If the sector reverts to longer-term norms, the multiple could range from 4.6x to 6.7x, affecting the stock’s valuation from approximately $42 to $63.50.
The Bottom Line: A Stock Worth Owning
Despite potential sector challenges, I remain confident that Boston Scientific will continue to deliver above-average growth and receive a multiple premium. While the stock may not be significantly undervalued on a discounted cash flow basis, it remains an attractive investment for long-term investors. With a fair value ranging in the $50s, Boston Scientific presents a compelling opportunity.