St. Jude Medical

Edmundo LozanoJune 21, 2010

Stock InformationTicker: STJ

Price (June 18, 2010): $37.39

52-week range: $31.66 - $42.87

Stock Information

Company OverviewManufactures cardiovascular medical devices

Manufactures world’s most used mechanical heart valve

Products: Heart Valves, Pacemakers, implantable defibrillators, and vascular catheterization devices

Separated into 4 segments: Cardiac Rhythm Management (CRM), Cardiovascular, Atrial Fibrillation, and Neuromodulation

45% of total sales are foreign

DivisionsCardiac Rhythm Management

(59%)◦Implantable Cardioverter

DefibrillatorsCardiovascular (20%)

◦Angio-SealAtrial Fibrillation (12%)Neuromodulation (7%)

Atrial Fibrillation

Industry AnalysisRecession-ProofTechnology-dependent Hospital spending is decreasingMedical device tax – $20 billion in 10 yrsForeign Currency is affecting profitsShort product life-cyclesYear-to-date through May 21, the S&P

Health Care Equipment Index was down 7.3%

Increasing Global demand for quality health care

CompetitorsBoston Scientific (BSX) – Manufactures

medical devices for CRM, Cardiovascular, and neuromodulation. Makes ICDs

Medtronics (MDT) – Industry leader which manufactures medical devices for CRM, Cardiovascular, and neuromodulation

Edwards Lifesciences (EW) – Specializes in cardiovascular diseases, specifically in heart valve therapy

Economic MoatEconomic Moat: WideBarriers of Entry: High

◦FDA regulation◦High developmental costs◦New technological advancements◦Patents◦Getting behind on technology

Recent NewsMarch: BSX suspends sales of its

entire line of ICDs due to product recall

Management has recently revised EPS growth expectations from 15% to ‘double-digit’ growth for 2010

Announcement came when management announced better than estimated sales

Management predicts 7 % - 8 % growth for 2010

BSX Market

4Q09 Growth by DivisionCRM: 2.5 % (-1.5 %)

◦Decrease in inventoryCardiovascular: 9.6 % (4.1 %)Atrial Fibrillation: 9.6 % (4.5 %)Neuromodulation: 20.5 %

*Source: Argus Research

New Markets

New Markets = New Competitors

  Description of threat/specialization Division(s) affectedABT Vascular Closure Devices CardiovascularBAX Develops medical products AllBDX Develops medical products AllZMH Spinal implants NeuromodulationBSX Specializes in cardiovascular CRM (All)IART Neurosurgery medical products NeuromodulationHNSN Diagnostic and ablation catheters Atrial FibrillationMDT Medical Technology Co. CRM, Cardiovascular, NeuromodulationEW Medical Technology Co. Cardiovascular, Atrial FibrillationATSI Specializes in cardiovascular CRM, CardiovascularATRC Cardiac surgical systems Atrial FibrillationGB Specializes in cardiovascular CRM, Cardiovascular, Atrial FibrillationCADM Specializes in CRM CRM, Atrial FibrillationBCR Medical Technology Co. CardiovascularCYBX Specializes in neuromodulation Neuromodulation

Technological FactorsABT has released Star-Close, a

new product that competes versus Angio-Seal

Advances in minimal invasive heart-valve repair has hurt CRM market share◦STJ years behind EW

Recent MRI-compatible pacemakers could hurt CRM market share◦MDT

Short product life cycles

Financial RatiosSTJ BSX MDT EW

Debt/Equity 0.93  1.05  0.84  0.40 

Current Ratio 2.40  1.34  2.37  3.06 

Dividend Payout

0.00  0.00  0.29  0.00 

ROE 0.23  (0.08) 0.17  0.20 

ROA 0.12  (0.04) 0.09  0.14 

Net Margin 0.17  (0.13) 0.15  0.17 

Asset Turnover

0.73  0.33  0.62  0.82 

Inventory Turnover

7.09  8.90  10.24  7.97 

Receivables Turnover

4.00  5.95  4.67  4.86 

DCF Assumptions5-yr Growth: 7.0 %Terminal Growth: 5.5 %Kd: 5.0 %

◦KdT: 3.7 %

Ke: 8.02 %◦Beta: 0.60◦Rf: 3.2 %

◦Market Premium: 8.0 %WACC: 5.9 %

Equity Valuation

Valuation Method

Equity Value

Weight Weighted Value

DCF $36.48 25% $9.12P/S Multiple $36.86 25% $9.22P/B Multiple $37.39 25% $9.35P/E Multiple $37.39 25% $9.35Total $37.03

Investment ThesisSTJ’s top 2 divisions are slowing down

in growthManagement has revised growth and

EPS outlook for 2010STJ is trying to break into the

neuromodulation market - speculativeHigh developmental costs due to

recent acquisitionsUncertainty of future technological

threats by competitors

RecommendationCurrent Price: $37.39

Equity Valuation estimate: $37.03

Recommendation: Hold

Risk Factors to RecommendationSTJ takes BSX’s market share

◦CRM division can profit in three years from battery replacements

2005 ANS acquisition puts STJ in a position to take advantage of a fast-growing market

STJ wins bid for Veterans Administration contract

STJ starts to hedge its foreign sales