Should You Buy Boston Scientific Stock Over Its Industry Peer?

BSX: Boston Scientific logo
Boston Scientific

We think that Boston Scientific stock (NYSE: BSX) currently is a better pick compared to its industry peer, Medtronic stock (NYSE: MDT), despite it being the more expensive of the two, trading at 5.3x trailing revenues compared to 4.4x for Medtronic. Even if we were to look at the P/EBIT ratio, BSX stock appears to be more expensively priced with 123x P/EBIT ratio, compared to 82x for MDT stock. This gap in valuation can be attributed to Boston Scientific’s better revenue growth, a trend likely to continue going forward as well, as we discuss in the sections below. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Boston Scientific vs Medtronic: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Boston Scientific’s Revenue Growth Is Stronger

  • Boston Scientific’s sales have jumped from $8.4 billion in 2016 to $11.5 billion over the last twelve months, while Medtronic’s revenues have risen from $29.7 billion in fiscal 2017 to $31.8 billion over the last twelve months.
  • Also, Boston Scientific’s revenue growth of 13.5% over the last twelve month period is comparable with 14.1% growth for Medtronic. Both the companies have seen a rebound in sales over the recent quarters, after seeing lower sales in 2020 due to the impact of the pandemic.
  • Looking at a slightly longer time frame, both the companies have seen slower sales growth. That said, Boston Scientific’s last three-year revenue CAGR of 3.4% is better than 0.3% CAGR for Medtronic.
  • Looking forward, with economies now opening up, the demand for medical devices is likely to remain high in the near term, boding well for revenue growth of both the companies. Also, the launch of new devices will bolster the revenue growth.
  • Boston Scientific’s Left Atrial Appendage Closure (LAAC) device – Watchman – continues to gain market share driven by higher physician utilization rate for now, but it is expected to face increased competition from the likes of Abbott going forward. For Medtronic, there are high hopes from its most advanced insulin pump system – MiniMed 780G – to drive its diabetes products sales going forward. The product is yet to be approved in the U.S. Our Boston Scientific Revenue and Medtronic Revenue dashboards provides more insight on the companies’ revenues and segments.
  • Boston Scientific’s revenue is expected to grow at a faster pace compared to Medtronic. The table below summarizes our revenue expectation for BSX and MDT over the next three years, and points to a CAGR of 6.5% for Boston Scientific, compared to a CAGR of 2.1% for Medtronic.
  • Note that we have different methodologies for companies negatively impacted by Covid, and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to pre-Covid revenue run rate, and beyond the recovery point, we apply average annual growth observed in the three years prior to Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider average annual growth prior to Covid with certain weight to growth during Covid and the last twelve months.

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2. Medtronic Is More Profitable And It Has A Better Cash Position

  • Medtronic’s operating margin of 5.3% over the last twelve month period is slightly better than 4.3% for Boston Scientific.
  • Furthermore, if we were to look at the recent margin growth, both of the companies have seen negative growth, with last twelve month vs last three year margin change at -3.5% for Boston Scientific, compared to a -12% change for Medtronic.
  • Looking at financial risk, Boston Scientific’s 15% debt as a percentage of equity is lower than 18% for Medtronic, while the latter’s 12% cash as a percentage of assets is higher than the 6% for Boston Scientific, implying that BSX has a better debt position, but MDT stock has a better cash position.

3. The Net of It All

  • We see that the revenue growth over the recent quarters has been similar for both the companies, while it has been stronger for Boston Scientific over the longer period. However, Medtronic is more profitable, it has better cash position, and it is trading at a comparatively lower valuation.
  • Despite that, looking at future prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe BSX is the better choice of the two. The table below summarizes our revenue and return expectation for BSX and MDT over the next three years, and points to an expected return of 18% for BSX over this period vs. just 7% for MDT, implying that investors are better off buying BSX over MDT, based on our dashboard – Boston Scientific vs Medtronic – which also provides more details on how we arrive at these numbers.
  • Note that Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious virus variants and infections in many geographies, including the U.S. and Europe, are higher than what they were a few months back. The concerns around Omicron have spooked the markets at large. If this recent large spike in Covid-19 cases from the new variant that we are witnessing now, results in a disruption in healthcare services, it is likely to impact the sales growth of both, Boston Scientific and Medtronic.

While BSX stock may outperform MDT, the Covid-19 crisis 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 Medtronic vs. Masco.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Jan 2022
MTD [1]
YTD [1]
Total [2]
BSX Return 0% 0% 96%
MDT Return 2% 2% 48%
S&P 500 Return -2% -2% 109%
Trefis MS Portfolio Return -5% -5% 273%

[1] Month-to-date and year-to-date as of 1/11/2022
[2] Cumulative total returns since the end of 2016

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