Stock Of The Day: Boston Scientific

I spend a good part of my day researching new ideas. I don't invest in the vast majority of the ideas I research and readers never hear about it. The market has been in a slow grind higher and there has been little new to write about. I am going to try something new and outline a stock every day regardless of whether I decide to invest in it or not.

The stock I will outline today is Boston Scientific, maker of stents and other medical devices. I decided to look at this stock because David Tepper of Appaloosa started a position in the company in the most recent quarter. From a valuation standpoint it is not difficult to figure out why Tepper took a position in the stock. The stock trades at nine times expected 2012 free cash flow and less than eight times expected 2014 free cash flow.

What I like:

  • Price to free cash flow of only 9 times.

  • Company has been returning cash to shareholders via repurchases and plans to continue to do so.

  • Nice expected free cash flow growth over the next few years.

  • Little economic sensitivity.

  • Diversified product line. Not dependent on a single product.

  • The assumptions embedded in their earnings  projections seem to be modest.

What I don't like:

  • The company is carrying quite a bit of leverage with $4.25 billion worth of debt on a market cap of $8.6 billion.

  • On an enterprise value (debt + equity) to free cash flow basis the company trades close to 14 times 2012 free cash flow estimates, which seems in the realm of appropriate.

  • The businesses they are in are very competitive and the moats are weak.

  • The biggest payers in healthcare are governments, which are in bad shape.

  • While assumptions are now modest, BSX has a history of missing.

My Conclusion:

David Tepper is likely looking at this stock as a cheap levered option, which is why he only has  a small position. I understand why people put cheap options in their portfolio. David Einhorn seems to do the same thing, with an example being Sprint. While I am attracted to these type of plays I ultimately usually take a pass and will this time as well.

1 comment:

Stock Of The Day Update said...

[...] Why David Tepper owns Boston Scientific [...]