With technology stocks in the grips of a bear market investors will look for growth outside of tech. Healthcare companies with reasonable valuations and intact fundamentals make sense for investors to buy on weakness.
Boston Scientific (BSX) could be a port in the storm for investors, given its solid organic growth, reasonable valuation, and demand visibility. The company is poised for consistent growth after a post-pandemic rebound as its med-tech products gain traction.
Boston Scientific develops and manufactures medical devices, with 40% of its revenues from the cardiovascular business. CEO Mike Mahoney has led a successful strategy for the past decade to significantly diversify the company's product offerings, including in urology, interventional oncology, and endoscopy. In 2012, drug-eluding stents and cardiac rhythm management accounted for half of revenues; now, it's less than 20%. BSX sells its products internationally in more than 120 countries reaching over 35,000 hospitals, clinics, outpatient facilities, and medical practices.
Various business segments linked to elective surgeries that were considerably weakened throughout the pandemic are starting to normalize. Hospitals still face staffing shortages and periodic Covid surges, but trends reflecting pre-pandemic business are returning.
Last week, Morgan Stanley hosted a fireside chat with Mike Mahoney before naming the stock a Top Pick with a $51 target. Morgan Stanley's med-tech analyst Cecilia Furlong is confident about the company's ability to hit short and long-run growth targets. She highlights its innovation, accretive tuck-in acquisitions, global expansion into China and emerging markets, and product diversification. She expects their business to sustain a 6-8% growth profile post-Covid-19 and at least 50 basis points of annual operating margin expansion, supporting double-digit EPS growth.
Cowen recently met with Boston Scientific's CFO and the firm believes the BSX can navigate the current slew of macro challenges and deliver on its 2022 guidance targets: "BSX has a healthy roster of growth drivers, led by Watchman FLX, that will strengthen further with key future US launches in Electrophysiology and TAVR, among other areas."
Although Boston Scientific is well positioned to manage through headwinds, its business is not immune to supply-chain bottlenecks in surgical equipment. There's a particular concern about the impact of a disruption in the supply from General Electric (GE) of contrast agents used in CT scans.
Deutsche Bank's med-tech analyst hosted a call with an interventionist cardiologist from a large hospital in Tennessee who believed a 30%-70% hit to volumes, particularly in the most deferrable cases, was possible due to contrast shortages. The analyst singled out the meaningful impact to Boston Scientific's business.
Healthcare stocks have performed well this year relative to the overall market. Demand for healthcare is mostly inelastic and growing with an aging population, giving the sector defensiveness in an uncertain economic environment.
Boston Scientific's shares are down 8% this year due to various headwinds, and about flat with pre-pandemic levels. Yet, revenues and earnings are at record levels -- 20% above 2019 sales -- with earnings growth projected to continue at a double-digit pace.
Medtronic's (MDT) earnings on Thursday will offer helpful insight into the sector's strength. Regardless, Boston Scientific is still executing well through headwinds and the shares can continue to outperform.