Streetwise for April 25,  2010

Streetwise

Lauren Rudd

Sunday, April 25, 2010

Consider Putting Your Trust In St. Jude

At this time last year many stock portfolios were hemorrhaging red ink and investors were distressed. While it is gut wrenching to watch the price one of your investments cascade downward, such events reinforce once again that investing on Wall Street requires a bit of emotional fortitude.

Yet, price declines and price volatility often translate into buying opportunities. Furthermore, companies where the share price decline is due to overall market trends and not internal ailments, will often see their shares rebound, much like the proverbial Phoenix. So if you were not fortunate enough to board the train the first time around, you may have another opportunity.

An excellent example of a train that was leaving the station last year but still has room for additional passengers is St. Jude Medical, a company I have written about any number of times. St. Jude manufactures and distributes cardiovascular medical devices.

When I last wrote about the company a year ago, my earnings estimate for 2009 was $2.55 per share, with a 12-month target price on the shares of $42. Looking at the scoreboard, earnings came in at $2.43 per share. However, the shares were recently quoted at $42.

If reference to my earlier comment regarding the potential for share price improvement, it is interesting to note what Shawn Tully, FORTUNE Magazine editor-at-large, wrote on April 15, after the announcement that St. Jude made the FORTUNE 500 list for the first time.

He wrote, "U.S. corporations are staging a nearly unprecedented comeback that's largely escaping notice ...For 2009, the FORTUNE 500 lifted earnings 335 percent, to $391 billion, a $301 billion jump that's the second largest in the list's 56-year history, approaching the increase in the robust recovery of 2003. For 2009, they raised their return on sales from less than 1 percent to 4 percent. That's close to the list's 4.7 percent historical average."

For its 2009 fiscal year, St. Jude reported net sales of $4.681 billion, with a five-year compounded annual growth rate of 15.5 percent. In addition to the recent FORTUNE 500 ranking, St. Jude Medical has been recognized by FORTUNE as one of the "Most Admired Companies" for six consecutive years. The company is also part of the S&P 500.

At the close of the first quarter, St. Jude reported sales of $1.262 billion, an increase of 11 percent over the first quarter a year ago. The increase was 8 percent if you adjust for the impact of foreign currency. Earnings for the quarter were $0.73 per share as compared to $0.58 a year ago, while the company’s operating margin improved by 2.5 percent.

With several new product launches scheduled for this year, the company offered up earnings guidance for 2010 of between $2.80 and $2.85 per share, assuming that the federal research and development tax credit is approved and the benefit is recognized during 2010.

The intrinsic value of the shares, using a discounted earnings model is $52 per share. To arrive at that number, assume that earnings of $777.2 million grow at a rate of 12.85 percent. You then discount those future earnings at a rate of 15.00 percent to arrive at a net present value for the company's next 10 years of earnings of $7.02 billion.

To account for potential earnings beyond the 10th year, I used a growth rate of 6.00 percent and a discount rate of 12.00 percent, resulting in a continuing value of $11.37 billion. Add those two numbers together, subtract out long-term debt of $1.59 billion and divide by the 324.5 million outstanding shares.

The more conservative free cash flow to the firm model, which can be found at www.ValuePro.net, yields an intrinsic value of $74 per share. Meanwhile, St. Jude’s shares have chalked up a 14.9 percent gain so far this year.