Earnings look poor. On February 2, the company announced results for the fourth quarter ended Dec. 31, 2011. These results disappointed on both the top and bottom lines, with earnings per share for the quarter of $0.07 comparing to $0.15 in the comparative quarter last year. Revenue was lower by 8%, falling to $1.84 billion from a shade over $2 billion. Revenues will be key and they do not currently look good. Once the company discounted restructuring charges, and acquisition and divestiture related expenses, the bottom line came in at an adjusted $0.13 per share compared to a like for like figure of $0.20 per share for the fourth quarter of 2010.
The cost picture also does not look good, in my opinion. Cost of sales for the quarter year on year remained static at $660 million, while other operating expenses rose from $993 million to $1.02 billion. The company needs to get its costs down significantly given its reduced profits.
On a brighter note, the company managed to increase its cash and cash equivalents on its balance sheet to $267 million from $213 million over the fiscal year and also reduced its debt by $700 million. Over the year, Boston Scientific repurchased 82 million of its shares, which gave the bottom line per share earnings number a 3% boost, and reduced its interest bill on its debt by over $110 million. This lower interest charge directly and positively impacted the bottom line. It is a bad sign that the company is using cash for share buybacks. I do not think management has better places to put investor capital at the moment.
Boston Scientific’s major markets lie across the cardiology and cardiac rhythm sectors and particularly in stents. Sales here dropped by 7% and 15% respectively. More positively, sales in endoscopy, peripheral interventions, and neuromodulation increased by an average of 6.5%. However, this is a smaller segment for the company. Results are weak regardless.
Boston Scientific’s numbers, and its falling sales in key market segments, smack of a company with products that are not competing effectively. It may be helped by the launch of its Promus Element Plus stent, but static costs of sales, leading to lower sales, leads me to believe that its sales pitch is not working and that competition is taking its toll. With St. Jude’s (STJ) recent results also showing weakness in the cardiac rhythm management market, it seems unlikely that Boston Scientific will see a quick turnaround in its fortunes. St. Jude has also made an entrance into the stent market which will make it compete even more directly with Boston Scientific. The companyacquired Micell last year, which has a drug-eluting stent that uses more absorbable polymers after implantation. The issue for Boston Scientific is that St. Jude’s innovation could potentially leapfrog its stents. Sophisticated investors should keep a close eye on innovations to prevent negative surprises. If Boston Scientific cannot compete, sales will decrease further.
I expect Boston Scientific’s weak guidance to continue. It seems to me that its debt of $4.2 billion is likely to weigh upon performance going forward which will add further to its woes in its markets. Its increasing presence in China and India, where revenues increased last year by 70%, is unlikely to replace failing sales in the U.S. any time soon. While foreign markets are promising, the company needs to stay ahead of the pack to compete. Other market participants can capture foreign market share, too. Boston Scientific’s shares are richly valued. Its shares, trading on a P/E ratio of over 20, and with no dividend to entice, seem ripe for another downturn after their recent bounce. I think investors should sell these shares now. I would be a buyer at $4 per share.