We believe that the stock price of Boston Scientific (NYSE:BSX) is undervalued at current levels of $43. BSX stock is up 65% from the levels of around $26 it was at on March 23, 2020, underperforming the broader markets with the S&P 500 rising 89% over the same period. The demand for medical devices remained sluggish for the better part of 2020, due to the postponement of elective surgeries, weighing on Boston Scientific’s stock performance.
BSX stock is also up a mere 21% from the levels of around $35 seen toward the end of 2018 (vs. S&P 500 rise of nearly 70%). The relatively small rise for BSX stock over the last two years or so is justified given the company’s lackluster fundamentals. Boston Scientific’s total revenue of $9.9 billion in 2020 compares to $9.8 billion in 2018, while they were down 8% y-o-y. This can be attributed to lower demand for medical devices and consumables, primarily in the first half of 2020, as the spread of Covid-19 resulted in fewer elective surgeries. Also, the company saw its net margins contract 710 bps to 13.9% in 2020, compared to 21.0% in 2018, resulting in a 33% fall in net income. The company’s total shares saw a growth of 1.3% over this period, and on a per share and adjusted basis, earnings declined 34% to $0.97 in 2020, as compared to $1.47 in 2018. Despite the earnings falling over the recent years, Boston Scientific’s P/E multiple has expanded from 24x in 2018 to 37x in 2020. Our dashboard, ‘What Factors Drove 21% Change In Boston Scientific’s Stock between 2018 and now?‘, has the underlying numbers.
While 2020 was a challenging year for Boston Scientific owing to the impact of the pandemic, we believe the company will see a sharp rebound in sales going forward. Several countries have undertaken large scale vaccination programs for Covid-19. Nearly 44% of the U.S. population is already fully vaccinated and these trends points toward normalcy returning sooner than earlier anticipated. In fact, Boston Scientific in Q1 posted an 8% top-line growth led by growth in all major segments. Looking forward, we forecast the top-line to grow a solid 19% y-o-y to $11.8 billion for the full-year 2021. The company will also benefit from its two acquisitions – Preventice Solutions, which offers mobile cardiac health solutions and services, including ambulatory cardiac monitors and mobile cardiac telemetry, and Lumenis, which develops laser systems, fibers, and accessories used for urology and otolaryngology procedures.
Looking at the valuation, BSX at the current price of $43 is trading at just 27x its expected adjusted EPS of $1.59 for 2021. The $1.59 figure reflects a solid 64% y-o-y rise, driven by margin expansion, led by increased sales and expenses growing at a slower rate compared to the revenues. Also, the pandemic led to increased operating costs in 2020, and the pressure on margins will likely ease in 2021. Now, the 27x P/E multiple for BSX stock compares with levels of 29x seen in 2018 and 37x as recently as late 2020, implying there is more room for growth.
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While BSX stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Avago Technologies vs ResMed.