During 2020 BSX’s stock price has faced several headwinds. The medical device industry (typically seen as a secular growth and less cyclical industry) was hit hard by deferrals of more elective procedures due to the COVID-19 pandemic. Sales dropped 20 to 30% in the 2nd quarter as people around the world were locked down. Boston Scientific’s management team, out of an abundance of caution, raised equity in May leaving technical pressure on the stock.
The most recent challenge for BSX was the announcement that the company was shutting down its Lotus Edge heart valve program. The stock dropped 8.3% the day of the announcement. These challenges have resulted in sub-par performance of the stock. At the time of writing, Boston Scientific is down 22.87% YTD, while the S&P is up 17.71% and the S&P 500 Healthcare Sector is up 11.64%.
The pandemic has skewed the growth numbers and shutting down the LOTUS program has lowered the company’s growth prospects, but the story driving growth in EPS and free cash flow still remains intact. Management remains confidence that the business can grow the top-line 6 to 8% organically and expand operating margins 50 to 100bps y/y for the next couple of years (using 2019 as a base year). Based on the assumption that 2022 is a completely normalized year, it is not unreasonable for BSX to do $1.97 in EPS in 2021. A 6% to 8% topline growth rate puts BSX at the top of its peer growth in terms of growth profile which on average trade at ~23x earnings.
Applying a 23x multiple to $1.97 in EPS gets you a $45.30 stock in a year representing a 29.7% return from current trading levels. Your downside is probably around $33, down ~5%.
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