On October 25th, St. Jude Medical, Inc. (NYSE:STJ) Board member John Brown purchased 25,000 shares of the company’s stock at an average price of $38.65 per share- an investment of nearly $1 million. Brown, a billionaire and former CEO of Stryker, joined the St. Jude Board in 2005. Insider purchases should be good signs for a stock: since an insider already has a strong economic connection to the company, it is rational for them to diversify their wealth away from the same company unless they are particularly confident that the stock price is going to rise in the future. We believe that this is why, statistically, stocks that are bought by insiders tend to outperform the market (learn more about studies of insider trading). St. Jude Medical, Inc. provides medical appliances and equipment, mostly products which are used in diagnosing and treating cardiac and cardiovascular conditions.
Revenue was down slightly in the third quarter of 2012 compared to the third quarter of last year according to the company’s report, after having been flat in the first half of the year from the same period in 2011. The company did some cost cutting, but a special charge resulted in earnings being down 22% (adjusted earnings were up 2%). The charges were due to restructuring events in one of St. Jude’s business segments. The stock is down 2% in the last year, while broader market indices have risen. Wall Street analysts are optimistic, anticipating moderate earnings growth over the next year which prices the company at only 11 times forward estimates. Adjusted net earnings per share are on track for $3.41 per share; this would imply a current-year P/E of 11 as well. We think that this looks like a good price if the business can continue to deliver steady results once it is no longer taking special charges.
Phil Gross and Robert Atchinson’s Adage Capital Management cut its stake in St. Jude Medical, Inc. over the course of the second quarter but still owned 2.3 million shares at the end of June (find more stocks that Adage owned). AQR Capital Management, which is managed by Cliff Asness, had a relatively small position at the beginning of April but bought the stock over the next three months to finish the quarter with a total of about 690,000 shares (see more stock picks from Cliff Asness).
Other healthcare equipment companies include Boston Scientific Corporation (NYSE:BSX), Edwards Lifesciences Corp (NYSE:EW), Medtronic, Inc. (NYSE:MDT), and Varian Medical Systems, Inc. (NYSE:VAR). Medtronic and Boston Scientific are priced similarly to St. Jude at forward P/E multiples of 11. Medtronic, easily the largest of these companies by market cap (it is over three times as valuable as St. Jude), actually trades at only 12 times trailing earnings, so it has very little to do in order to meet analyst targets and, at a 2.5% dividend yield, looks like a value stock as well. Boston Scientific reported a large net loss during the third quarter, which stemmed partly from lower earnings in key business segments; with these other companies looking more stable at similar multiples, we’d avoid that stock.
Edwards is priced much more for growth; its $10 billion market cap represents a multiple of 27 times analyst consensus for its 2013 earnings. Earnings in the third quarter were strong- up 34% from the same period in 2011- but was based on a considerably smaller revenue growth rate, so we’re not sure if net income can continue to grow at a similar pace for a long enough time to justify the stock price. Varian has also been delivering good growth recently, with its earnings also up at a double-digit rate in its most recent quarter versus a year earlier. Its earnings multiples tend to be in the teens, as expectations for continued growth give it a premium relative to peers like St. Jude and Medtronic. We might look at it in more detail, but for now would prefer the low growth and low pricing- and therefore, in our minds, lower risk- of those two companies.
We think that Brown has made a good purchase here. St. Jude looks cheap and its business appears to be doing fine, and unless investors study the company and Medtronic in more detail and find the latter even more attractive we think that it is a value play.