St. Jude’s Growth Is Looking Sickly

SJM_Logo_lgThere isn’t much a company can do when investors have fallen in love with their stock. Shares of St. Jude Medical (NYSE: $STJ) have soared close to 40% over the past six months, management has done nothing to taper the optimism. This is a good thing. But I don’t see where there’s meaningful value left for new investors.

The good news is that the company continues to make progress and has moved on from prior controversy over its Riata leads. You can argue that the depths from which St. Jude has emerged is enough to believe the worst is over. That may be so.

My problem is that growth has sputtered. At best, the recent results have not justified the valuation. And with better bargains out there such as Johnson & Johnson (NYSE: $JNJ) and Medtronic (NYSE: $MDT), St. Jude’s execution has to be perfect over the next several quarters to sustain this level.

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With fourth-quarter revenue advancing roughly 4% year over year, I’ve developed doubts about St. Jude’s clinical pipeline. Given that the company just reported (in my opinion) its fifth consecutive so-so quarter, I worry that investors are showing too much patience waiting on St. Jude to produce the sort of returns the valuation presumes.

In fairness, there wasn’t anything to be surprised about in St. Jude’s earnings report. In most cases, that would be a good thing. But investors aren’t paying for non-events. Not at almost twice the multiple of Medtronic.

As I’ve said, though, the company is making progress. The 6% year over year growth in its Cardiac Rhythm Management was one notable example. I was equally pleased (even stunned) to see the 7% jump in the implantable cardioverter defibrillators business.

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If you recall, in the October quarter the ICD segment grew at just 3%. And there were concerns that St. Jude was bleeding market share to Medtronic and Boston Scientific (NYSE: $BSX). Truth be told, I was one of those critics. But I can’t say that I feel the same way today.

As it stands today, an argument can be made that St. Jude is gaining share on both Medtronic and Boston Scientific. The question, though, is whether this supposed share gain in one segment is enough to send this stock to its current 52-week high. This is where I disagree, even if we were to credit St. Jude for its solid performance in cardiovascular, which was up 7% year over year.

Relative to expectations and the sector’s performance, it’s a decent number. But we have to then reconcile the 8% growth in atrial fibrillation. Although it’s a strong high-single digit number, it’s still 2% short of the October quarter. St. Jude essentially took a step backwards.

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Although it’s encouraging the company is may be gaining share against Medtronic in ICDs, this was offset by St. Jude’s decline against Johnson & Johnson in atrial fibrillation. And it doesn’t appear as if prior excitement about the company’s new catheters and its MediGuide system were rightly placed.

What’s more, there’s still the overhang of the Food and Drug Administration, which sent St. Jude a warning letter regarding the safety of the Durata Leads. Despite this, that the neuromodulation business was up 8%, a pleasant surprise.

But as I’ve said, I don’t believe this is enough to overlook the potential risks that still remain in this stock. Not when investors can buy Johnson & Johnson at a multiple that is 8 points less and pays out almost double in the dividend.I’m not here suggesting that St. Jude is a bad company. But with the recent drop in gross margin, leading to a 5% decline in operating income, I just don’t see how the stock makes sense right here.

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