Friday, February 13, 2009
(Cont'd from above)...

Jim:     

But now Boston Scientific is a lowly $8 stock… it has done a lot to turn itself around… and it is a business that we know is about as recession resistant as you can get… we know that from talking to Dan Starks, the CEO of St. Jude Medical Inc. (STJ)… a similar, but admittedly much-better-run company that was just on Wednesday… in short… for Boston Scientific… it is time to buy… according to my friend, buddy, pal David Pelletier, at TheStreet.com, who runs the dividends stock advisor newsletter and nailed Harley Davidson as a sell this week… the turnaround at BSX is real… and we believe him… on January 28th, BSX reported a very strong fourth quarter… delivering .21 cents of earnings per share… the street was only looking for .13 cents… but nobody cared… and for the first quarter of 2009, managements earnings forecast of .15 to .20 cents a share was well ahead of the streets consensus of .13 cents…. again people yawned… they do not like this stock… there were a lot of good things in this quarter… BSX’s year over year growth in the drug coated stint market returned to positive territory… following a 23% in decline in 2007, because of safety concerns… remember we told you get out of the stock.

Now BSX has an impressive 47% of this market… they also took share in the implantable defibrillator business… thanks to the sale ramp of two new products… probably grabbing some of the biz share from Medtronic Inc. (MDT)… which is the market leader… that is bad news for Medtronic… and yes, bad news for Medtronic is yes good news for Boston Scientific… the strong quarter prompted two analysts to upgrade the stock… but it is still trading where it was before it reported its earnings… courtesy of this dismal market… in my opinion… this is a gift… I am calling it a genuine Valentines Day Stento Gram… guaranteed to get your heart beating… and you don’t often get to buy a stock for the same price after it just reported a strong earnings beat… as a matter of fact, this is the only one of the earnings beats that is actually right where it was before it happened… of the major beats.

At less than $9 a share… I think this stock looks very tempting… most of its procedures are elective you don’t get a stent because you want one, you get it because you need it to keep your arteries up… not elective, I am sorry… that is not the kind of business that gets hurt during a recession… you get this because they think you are going to die… but a lot of people have been burned believing that BSX has turned a corner… trust me… this one has been a real heartbreaker… not a Led Zeppelin heartbreaker… or even a Mariah Carrey heartbreaker… for the younger demo.

So how do we know that the turn is real… $6.7 billion in debt on that balance sheet… and the memory of Guidant is still with us… those are real negatives… that said… over the last 18 months the company has pre-paid $2.2 billion in debt… it now has $1.6 billion in cash on hand… its next debt maturity of $825 million isn’t until of April of 2010... I feel confident that they can roll that over… BSX has been thru a restructuring process… it has done the perestroika thing basically… took a portfolio of 100 different investments… combing it down to about 20... by selling off non strategic assets… in 2008 the company got $1.4 billion from these asset sales… used that money to pay down debt… that is what we want to see… that is how it cleaned up its balance sheet… at least somewhat… they intend to shut down 5 of its 17 plants in the next 3 years… eliminate 4300 jobs… that will save them money… again, we need that from any indebted company.

BSX is a cash machine… think of it as an ATM… generating $100 million in cash flow every month… which is much better of course than a sharp Bowie knife in the eye… especially in this market.. the company launched 6 new products in cardiac rhythm division in 2008... expected to launch 3 more this year in Japan… that is the worlds second largest health care market… 2009 new products should account for 2/3 of its cardiac rhythm divisions revenue… BSX is also launching 3 new products in the Us in cardio vascular and other divisions… 12 new launches outside of the US… now this is pretty amazing… it expects 38% of its revenue to come from new products… the company is reinventing itself… even if Boston Scientific stock has been bludgeoned right down to the dreaded under ten zone… the company has been focused on innovation… I think its strive will recover.

Now, what about catalysts… BSX next generation drug releasing stent called the Promas Alman is expected to be approved by the EU and launched in Europe this year… the sooner this happens the more confident the analysts that are still waiting on the fence will be… that is a big data point… all of this adds up to a company in what I think is the most attractive area of the market… look, I mean post 5% to 7% sales growth… double digit annual earnings growth over the next couple of years… there is no group that I follow that is better than the medical devices right now… and this… even though it is the worst house in a great neighborhood… which is a lot better than being the best house in the house of pain.

Here is the bottom line…

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