It’s always interesting when companies do more or less what they said they would, but changing investor expectations alter the context of those results. For instance, most medical device companies have come in relatively close to expectations this quarter, but there has been ample fretting and carping about the ongoing weakness in underlying volumes. This isn’t news, but with many of these stocks having significantly outperformed the market over the past year, the implied expectations have changed.
With that in mind, then, it is worth taking another look at some of the more notable med-tech earnings report of the past week or so.
Covidien shows it’s not just competition
When Johnson & Johnson (NYSE:JNJ) and Intuitive Surgical (NSDQ:ISRG) came in weaker than expected on surgical procedure growth, one of the first thoughts was that competitors like Covidien (NYSE:COV) and Stryker (NYSE:SYK) could be gaining share. While it does look like JNJ is the share-donor in this space, Covidien’s results show a broad malaise that goes beyond competition.
On an adjusted organic basis, Covidien’s overall med-tech growth was below 5% and the weakest it has been in some time. Now it’s true that comps are getting more challenging, but the performance was universally "meh" relative to expectations and the performance in the U.S. was notably weak. Coincidentally, while Covidien may be causing some competitive problems for JNJ in surgery, it looks like JNJ is likewise taking some business in peripheral from Covidien.
Boston Scientific staggering toward a better future
For some time now, Boston Scientific (NYSE:BSX) has resembled a punch-drunk boxer just hoping to make it to the bell and survive into the later rounds. The company’s stent business has been gutted by competition from Medtronic (NYSE:MDT) and Abbott (NYSE:ABT), while the cardiac rhythm management has lost considerable ground to St. Jude Medical (NYSE:STJ).
Maybe better days are in sight, though. While the CRM business was down again this quarter, it was down less than St. Jude. What’s more, the headwinds from the stent business should abate as the year moves on, allowing BSX to go back to reporting revenue growth. That said, I don’t want to give the impression that Boston Scientific is close to having its problems worked out – the company still gets nearly two-thirds of its business from slow-growth markets, the company’s margins in businesses like CRM are pretty poor, and it’s not clear to me where the company has a real foothold from which to grow. Still, Boston Scientific is still standing and the never-ending turnaround process here may be close to actually showing real results.
Is the great Edwards growth story already fading?
Edwards Lifesciences (NYSE:EW) has been a problem stock for me for a while now, as I’ve thought that the Street was significantly overpaying for the company’s growth prospects. To that end, the stock is down about 20% now over the past year and down about 40% over the past six months as investors have recalibrated their growth expectations for the company’s transcatheter heart valve business.
Revenue was up 10% this quarter, which outside of names like Intuitive Surgical and HeartWare International (NSDQ:HTWR), would be one of the better growth stories in med-tech. Unfortunately, analysts were looking for 15% growth and this marked the third straight quarter of below-expectation growth of TAVR revenue in the U.S.. With Medtronic coming on, and to be followed by St. Jude and Boston Scientific with their own transcatheter valves, the break-out growth opportunity may be ending. If Edwards follows the usual pattern, investors will over-correct in their rush to abandon the stock and the shares may yet end up looking undervalued relative to the new expectations.
Bard may be the sort of story that works
While the point of this column is not to focus on a particular company, C.R. Bard (NYSE:BCR) jumps out to me as the sort of med-tech story that could work over the next year or two. Certainly the growth here was no better than we’ve seen across the space – organic growth was up about 1% to 2% (depending on how you handle changes in selling days), with weak results in vascular and surgery offset by slightly better results in urology and oncology.
That vascular and surgery were weak is not surprising – we’ve seen that now from others like AngioDynamics (NSDQ:ANGO), Covidien and so on. Likewise, oncology remains a relatively safe spot in med-tech.
What’s interesting about Bard, though, is what happens a bit down the road. The company is pursuing litigation against Gore and expects to generate substantial proceeds from the eventual resolution – money that the company will likely invest into new growth opportunities. That opportunity, coupled with the fruition of past R&D investments could make this an interesting revenue growth story post-2014 and an interesting stock in the interim as the Street factors in those new expectations.
The bottom line
To be sure, almost every med-tech stock has a story to tell, so it’s not quite helpful to suggest that investors look for a story before investing. What I do think investors should do, though, is look for situations where the Street hasn’t really caught on to what’s happening with the company.
Pretty much everybody now accepts that Covidien is running a very solid med-tech business, but there’s still rampant (and historically well-deserved) skepticism about Boston Scientific’s turnaround efforts. Likewise, while Edwards has double-digit growth today, the outlook is worsening while Bard’s weak present day revenue growth may obscure the longer-term opportunity for this company.
With so many stocks in this sector already sporting market-beating returns over the past year, it’s time to get more selective. There are still good stories out there in med-tech, but with tough underlying volume and price dynamics and elevated expectations, investors would do well to get a little more discerning with their picks.
Stephen Simpson CFA is a former sell-side and buy-side analyst who focuses most of his professional attention on financial and investment writing. In addition to a decade of work as an analyst, Mr. Simpson has worked as a wet-bench biomedical researcher and a consultant in the med-tech industry, as well as writing on a freelance basis for over 10 years. He can be reached via email at tuonela.fool@gmail.com.
