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St. Jude Medical

St. Jude Medical. Edmundo Lozano June 21, 2010. Stock Information. Ticker: STJ Price (June 18, 2010): $37.39 52-week range: $31.66 - $42.87. Stock Information. Company Overview. Manufactures cardiovascular medical devices Manufactures world’s most used mechanical heart valve

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St. Jude Medical

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  1. St. Jude Medical Edmundo Lozano June 21, 2010

  2. Stock Information • Ticker: STJ • Price (June 18, 2010): $37.39 • 52-week range: $31.66 - $42.87

  3. Stock Information

  4. Company Overview • Manufactures 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

  5. Divisions • Cardiac Rhythm Management (59%) • Implantable Cardioverter Defibrillators • Cardiovascular (20%) • Angio-Seal • Atrial Fibrillation (12%) • Neuromodulation (7%)

  6. Atrial Fibrillation

  7. Industry Analysis • Recession-Proof • Technology-dependent • Hospital spending is decreasing • Medical device tax – $20 billion in 10 yrs • Foreign Currency is affecting profits • Short product life-cycles • Year-to-date through May 21, the S&P Health Care Equipment Index was down 7.3% • Increasing Global demand for quality health care

  8. Competitors • Boston 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

  9. Economic Moat • Economic Moat: Wide • Barriers of Entry: High • FDA regulation • High developmental costs • New technological advancements • Patents • Getting behind on technology

  10. Recent News • March: 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

  11. BSX Market

  12. 4Q09 Growth by Division • CRM: 2.5 % (-1.5 %) • Decrease in inventory • Cardiovascular: 9.6 % (4.1 %) • Atrial Fibrillation: 9.6 % (4.5 %) • Neuromodulation: 20.5 % *Source: Argus Research

  13. New Markets

  14. New Markets = New Competitors

  15. Technological Factors • ABT 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

  16. Financial Ratios

  17. DCF Assumptions • 5-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 %

  18. Equity Valuation

  19. Investment Thesis • STJ’s top 2 divisions are slowing down in growth • Management has revised growth and EPS outlook for 2010 • STJ is trying to break into the neuromodulation market - speculative • High developmental costs due to recent acquisitions • Uncertainty of future technological threats by competitors

  20. Recommendation • Current Price: $37.39 • Equity Valuation estimate: $37.03 • Recommendation: Hold

  21. Risk Factors to Recommendation • STJ 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

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