St. Jude Medical SELL

STJ : NYSE : US$64.98
Target: US$51.00

St. Jude Medical is a large medical device company
targeting large cardiovascular and neuromodulation
markets — namely cardiac rhythm management
(pacemakers and implantable cardioverter defibrillators),
atrial fibrillation (surgical/catheter ablation and
advanced mapping/diagnostics), heart valves, vascular
closure and spinal cord stimulation.
All amounts in US$ unless otherwise noted.

Life Sciences — Biomedical Devices and Services
Investment recommendation
While we are clearly bearish on the stock at current levels – and
maintain our SELL rating – let us first give credit where it is due.
Management has built a successful large-cap company over the past
decade. STJ was an early entrant into CRM (before it was a hyper
growth market) and built the franchise into the #2 player, still gaining
modest share to this day. Perhaps even better than many of its large-cap
cardio peers, STJ has built other businesses successfully through M&A
(A-Fib, Vascular, Neuro), followed by iterative product innovation– to
drive solid growth predominantly from the late ‘90s through 2010.
To be clear, our bearish view is on the stock; and is a function of current
valuation relative to 1) how sales growth has trended over the past 4
years (10%, 9%, -2%, 0%), 2) our bearish view going forward of new
growth drivers heretofore trumpeted by management (e.g. TAVI, RD,
PFO, LAA), and importantly, 3) earnings trends – namely the increasing
discrepancy between “adjusted” and GAAP EPS from 2009 through
STJ reported Q4 GAAP EPS of $0.42 – $0.57 below its “adjusted” EPS of
$0.99, driving ‘13 GAAP EPS of $2.49 – 31% below its original GAAP
guidance of $3.64. This discrepancy has not only repeated itself for 4
straight years, but has increased; “non-recurring” expenses from 2010-
2013 were $87M, $210M, $341M and $371M, within which
“restructuring” charges (2011-2013) were $121M, $198M, and $174M,
respectively. STJ missed original GAAP EPS guidance (given at the
beginning of each year) by an average of 25% each of the past 3 years,
yet still reported “adjusted” EPS essentially “in-line” with original




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