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.
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.