Streetwise for Sunday April 26, 2009

Streetwise

Lauren Rudd

Sunday, April 26, 2009

Don't Miss The Train...Again

For many the euphoria of investing on Wall Street has evaporated, proving once again that the wiles of Wall Street can be exasperating. Furthermore, watching the price of a stock in your portfolio cascade downward, after clawing its way upward for one or more years, can be gut wrenching. Therefore, it should come as no surprise that investing on Wall Street requires a bit of emotional fortitude.

Yet, any drop in the price of a stock translates to a potential buying opportunity. Furthermore, market performers, those companies whose price has fallen due to overall market trends rather than a specific ailment within the company, often see their share prices take to the skies again, much like the proverbial Phoenix. So if you were not fortunate enough to board the train the first time around, you may have another chance.

An excellent example of a train once again leaving the station is St. Jude Medical, a company I have written about any number of times. St. Jude manufactures and distributes cardiovascular medical devices. When I wrote about the company a year ago, my earnings estimate for 2008 was $2.10 per share. Excluding one-time charges and a fourth quarter income tax benefit, adjusted net earnings for 2008 were $807 million or $2.31 per share.

So does the company continue to perform? In its recently released first quarter statement, St. Jude reported net earnings of $201.3 million or $0.58 per share. Operating profit for the quarter increased to $282.3 million from $259.5 million last year. Net sales for the first quarter increased 12 percent to $1.134 billion from $1.011 billion in the year-ago period. After adjusting for the impact of foreign currency, sales increased 17 percent over last year.

Selling, general and administrative expense for the quarter did increase to $417.7 million from $367.1 million a year ago, while research and development expenses came in at $139.3 million, up from $123.6 million a year ago.

In its forward looking guidance, the company said it expects earnings for the second quarter of 2009 to be in the range of $0.62 to $0.64 per share. For the full-year, St. Jude Medical reaffirmed its earnings guidance of $2.48 to $2.54 per share. Of note is the 37.5 percent five-year compounded annual growth rate of free cash.

Sector wise, St. Jude is in a highly competitive industry characterized by short product life cycles and volatile fluctuations in market share. At the same time, potential competitors face significant barriers due to the lengthy FDA approval process and the major investments required in both R&D and distribution.

Looking at St. Jude’s competitors, Boston Scientific recently reported a first-quarter net loss of $13 million or $0.01 per share, compared to net income of $322 million or $0.21 per share for the same period a year ago. Net sales declined to $2.01 billion from $2.04 billion in the earlier-year quarter.

This past February, Medtronic reported its third quarter results, posting a net income of $723 million or $0.65 per share, compared to income of $77 million or $0.07 per share in the prior year period. Third quarter revenue was $3.49 billion, as compared to $3.41 billion a year ago.

The intrinsic value of St. Jude’s shares, using a discounted earnings approach, yields a per share value of $68, while the more conservative discounted free cash flow to the firm model suggests an intrinsic value of $76.

The shares recently closed at $35.50 and have traded in the range of $24.98 to $48.49 during the past 52 weeks. The average daily volume over the past three months has been about 4.03 million shares.