Boston Scientific is a leading company specializing in medical devices for a wide range of interventional solutions. The stock has been racking up record highs in recent months. Let's see if this is justified.
Boston Scientific operates mainly in two segments: MedSurg and Cardiovascular. It is active in devices for endoscopy, urological disease management, neuromodulation, cardiovascular disease treatment, cardiac rhythm management and peripheral interventions. The product mix includes stent systems, catheters, neuromodulation systems, left atrial appendage closure devices and implantable cardiac monitors. Across all its specialties, Boston Scientific serves around 33 million customers, with revenues split between the USA (59%), Europe, Middle East and Africa (20%), Asia (16.8%), Latin America and Canada (4%).
Some key products in various specialties (source: Boston Scientific)
The company is well positioned and targets mainly fast-growing markets. Approximately half of its revenues come from segments with annual growth rates in excess of 7%. Boston Scientific aims to increase its exposure to these products. As a result, the proportion of revenues derived from high value-added products should reach 60% by 2026, compared with 50% at present. In addition, a third of sales are linked to markets enjoying moderate growth, with an increase of between 4% and 7%. The remaining 20% relates mainly to more mature products, such as pacemakers and defibrillators, which are growing at less than 4% a year, but which provide recurring revenues.
In addition to its success in generating strong organic growth, Boston Scientific has also made a number of acquisitions. This is hardly surprising for a medical equipment manufacturer of its size. However, over the 2014-2024 cycle, the group has spent $1.5 billion a year on acquisitions, which represents around 9% of its annual sales. This is far from anecdotal. The latest of these was Bolt Médical earlier this year. Bolt Médical is a developer of an advanced laser platform that uses ultrasound shock waves produced by a generator (intravascular lithotripsy technology) to treat coronary and peripheral arterial disease. In another example, last year Boston Scientific acquired Axonics for $3.7 billion. Axonics focuses on the development and marketing of devices to treat urinary and intestinal dysfunctions.
Some examples of acquisitions last year (source: Boston Scientific)
Over the last decade (2014-2024), sales have almost doubled. At the same time, operating margin has risen sharply from 14% to 26.3%. However, the trajectory of EPS (earnings per share) is highly unstable. In fact, the income statement shows significant annual charges relating to legal settlements ranging from $90 million in 2019 to $804 million in 2016, impairment of acquired assets (which have risen sharply in recent years), and heavy restructuring costs. The last restructuring plan announced dates back to 2023. It is still underway and aims to optimize the supply chain by simplifying production and distribution networks.
The evolution of NBI is not worthy of a major growth company (source: MarketScreener)
In terms of free cash flow to equity (FCFE), the money the company actually has at its disposal at the end of the financial year after payment of interest on debt and capital expenditure, the situation is not exceptional either. The company generates a minimum of $1 billion in FCFE per year (excluding 2018), but there is no growth in this metric. This means that the company has the same amount to allocate per year even as the balance sheet grows. Speaking of the balance sheet, one good point: debt is well under control and represents just over twice EBITDA.
All of this is dearly valued. Nearly 80 times earnings this year, a capitalization/sales ratio of over 9 and an enterprise value/free cash flow of 60.
It's true that Boston Scientific has a lot going for it. Growth is strong, margins are robust, positioning is good and should be even better over the next few years as it continues to refocus on value-added products. Analysts are optimistic about the stock, with 22 of the 33 specialists following it as Buy and 7 as Hold. The outlook is optimistic, and the Group has a good track record of regularly exceeding expectations.
Behind all this, there's a catch. The company is leaving a lot of money on the table. Admittedly, the numerous acquisitions entail high integration costs. But for all that, profits are far too badly hit. The next few years will have to suggest a better ability to turn growth into hard cash.
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