Buy the stocks of Universal Health Services Inc (NYSE: UHS)

Summary: 

Universal Health continues to benefit from higher number of Medicaid and Medicare patients, which lowers uncompensated charges thereby driving top-line growth. Moreover, accretive acquisitions present significant growth opportunities in the behavioral market. The recently announced share buyback program will boost earnings in 2016. Meanwhile, estimates have been stable lately ahead of the company’s second-quarter earnings release. We note that the company has positive record of earnings surprises in recent quarters. However, frequent acquisitions present integation problems. Moreover, higher level of debt remains a significant headwind. 

Reasons To Buy: 

• Currently valued at $2.9 trillion, the U.S. healthcare industry is expected to grow by leaps and bounds in the coming years as the population ages. The rising number of baby boomers, who are expected to account for more than 20% of the total U.S. population by 2029, boosts demand for healthcare services. Per the Centers for Medicare and Medicaid Services’ (CMS) projection, total U.S. healthcare spending is poised to rise 6.1% annually on an average between 2016 through 2024, as a result of the increasing number of insured patients, faster projected economic growth and an aging population. We believe that these trends present significant growth opportunities for Universal Health.  
• Universal Health is expected to significantly benefit from the favorable Obamacare ruling passed in late June this year. A broader insured customer base will not only lower charity care and bad debts but also increase admission rates on the back of improving affordability among patients. In 2015, net revenue per adjusted admission inched up 3.9% year over year. We believe lower amount charity care and uninsured discounts will improve top-line growth over the long term. 
• Over the years, acquisitions have played a key role in building Universal Health’s growth trajectory. The company spent $534 million on acquisitions that added almost 700 beds to its overall facilities. In Feb 2015, the company bought Orchard Portman House Hospital, a 46-bed behavioral health care facility located near Taunton in the U.K. Further, in August, Universal Health took over Alpha Hospitals Holdings Limited in the U.K. The Alpha Hospitals takeover expanded Universal Health’s tally to 21 hospitals and approximately 1,100 beds in the nation. In October, the company acquired Foundations Recovery Network for approximately $350 million. This transaction expands Universal Health’s footprint in the U.S. by adding 322 residential beds across 4 facilities and 8 outpatient centers. The company further plans to set up 140 beds over the next 12 months. We believe the company will continue to pursue acquisitions that will help it to expand its domestic as well as international presence. 
• Behavioral facility acquisitions help Universal Health to win market share in the fast growing addiction and mental health disorder market. New laws (2008 Mental Health Parity and Addiction Equity Act as well as Obamacare) have raised the insurance coverage for patients suffering from substance abuse as well as mental disorders, which is a major positive for companies like Universal Health. The company focuses on behavioral indications like eating disorders, sexual trauma, Autism as well disorderliness in the military through its patriot support program. These will further boost admission rate thereby driving top-line growth over the long term. 

Risks:  

• Since inception, Affordable Care Act (ACA) or Obamacare has significantly benefitted the hospital industry, including Universal Health, by increasing the insurer base and lowering uncompensated charges. However, the upcoming presidential elections can upset this momentum as Republicans continue to oppose the various provisions of law. A Republican president at the White House will likely spell doom for the ACA, which does not bode well for the whole hospital industry in our view. 
• Universal Health derives a significant portion of its operating revenues (35% in 2015) from the Medicare and Medicaid programs. The company generates $90 million of Medicaid revenues annually from each of the following states – Texas, Washington, D.C., California, Nevada, Illinois, Pennsylvania, Virginia, Florida and Massachusetts. Thus, any cut in state government reimbursements owing to budgetary constraints may impact the company’s overall financial performance. The hospital service industry will face approximately $600 billion in reimbursement cuts over the next decade, and Congress has ordered a number of cuts in hospital payments to fund the increase in physician payments. We believe that this is a potent headwind for the company, especially for the long term. 
• Universal Health continues to acquire a large number of hospitals. While this improves revenue opportunities, it adds to integration risks. The frequent acquisitions may impact its balance sheet in the form of a high level of goodwill and intangible assets, which totaled $3.60 billion, or 37.3% of its total assets as of Dec 31, 2015. Frequent acquisitions are also a distraction for management and could impact organic growth, going forward. 
• Universal Health’s balance sheet is highly leveraged. As of Dec 31, 2015, total debt stood at $3.45 billion. Such high debt levels may limit the company’s expansion plans and aggravate risks. Higher interest expense on debt is also expected to impact profits.  

Buy the stocks of Washington Federal Inc. (NASD: WAFD)

Summary: 

Washington Federal’s third-quarter fiscal 2016 (ended Jun 30) earnings beat the Zacks Consensus Estimate, largely driven by higher net interest income, a provision reversal and falling operating expenses. However, a marginal dip in other income was an undermining factor. While growing demand for loans should continue fueling the company’s organic growth, a robust capital position will help it grow inorganically. Also, the company’s steady capital deployment activities should draw investors’ attention. However, we remain apprehensive about the impact of weak cost control, compressed margin and substantial exposure to a risky loan portfolio on the company’s profitability.

Reasons To Buy: 

• Growth in loans indicates a strong business trend for Washington Federal. With improvement in the economy and investors’ rising confidence, the demand for loans is expected to grow further. The company generated net loans of $9.63 billion as of Jun 30, 2016, which constituted 65% of its total assets.
• Washington Federal's credit quality continues to improve. Since fiscal 2010, credit costs (including provision for loan losses and gains/losses on sales of REO) have declined significantly. Notably, provision for loan losses reflected a reversal of $1.7 million in the first nine months of fiscal 2016 compared with an expense of $45.0 million in fiscal 2010.
• Washington Federal’s earnings streak, along with its trend of returning capital to shareholders, should boost investors’ confidence in the stock. The company has been consistently hiking its dividend over the past several fiscal years – 18% in 2015, 10% in 2014, 11.1% in 2013, 12.5% in 2012, 33.3% in 2011 and 20.0% in 2010. Additionally, the company has share buyback authorization in place. As of Jun 30, 2016, the company had authorization to repurchase around 1 million shares. 

Risks: 

• Mounting operating expenses pose a major challenge for Washington Federal. Over the last 6 years (2010–2015), expenses have increased at a CAGR of 11.3%, with the same trend continuing in the fiscal first nine months of 2016. Expenses should increase further due to branch acquisitions and continued investment in franchise. 
• Washington Federal is benefiting from deposit re-pricing due to lower deposit rates, but it is lagging its competitors with respect to the same. Though NIM increased in the fiscal first nine months of 2016 and in fiscal 2015, it has been declining over the past 4 fiscal years – 3.35% in 2011, 3.18% in 2012, 3.17% in 2013 and 3.05% in 2014 – due to lower yields on cash and investment balances. We expect NIM to remain under pressure until the interest rate environment improves significantly. 
• Further, Washington Federal has considerable exposure to risky loan portfolios. Nearly 69% of the company’s loan originations comprise of commercial loans. We also remain concerned about the company’s exposure to consumer loans, accounting for the remaining 31% of the total loan originations. Though the company has been reducing its exposure to these loan portfolios, we do not anticipate significant improvement any time soon. 

Buy the stocks of Reliance Steel & Aluminum Co. (NYSE: RS)

Summary:

Estimates for Reliance Steel have been goning up ahead of its second-quarter 2016 earnings release. The company has positive record of earnings surprises in recent quarters. Reliance Stee is well placed to leverage the strong momentum across a number of end markets, including aerospace. It should also gain from its broad and diversified product base, wide geographic footprint and aggressive acquisition strategy.

Reasons To Buy:

• Reliance Steel’s core business strategy is to enhance its operating results by way of strategic acquisitions and expansion of its existing operations. The company is focused on diversifying its products, customers and geographic coverage which helps it to counter the adverse effects macro and microeconomic events. The acquisitions of McKey and National Specialty Alloysvenabled the company to improve its product offerings along with expansion into newer markets. Moreover, the company, in April 2012, wrapped up the acquisition of all the assets of the Worthington Steel Vonore plant from Worthington Industries Inc. (WOR). The acquisition, which complements Reliance Steel's existing portfolio, expands its presence in the Southeastern regions of the U.S. The acquisition of the assets of Airport Metals marked Reliance Steel’s first foray of into the Australian market. The company further expanded its global network with the addition of these assets. Moreover, the acquisition of Sunbelt has allowed Reliance Steel to serve customers across a number of oil and gas well drilling categories including vertical, horizontal, directional and deepwater drilling applications. The company hopes to leverage Sunbelt’s growing presence in specialty markets. Moreover, the acquisition of Metals USA is a strategic fit with Reliance Steel’s portfolio and complements its existing customer base, product mix and geographic footprint. With the acquisition, Reliance Steel added about 48 service centers, which are strategically located throughout the U.S. The company expects synergies of $15 million to $20 million a year. The acquisition of primarily carbon steel and aluminum products processor Haskins Steel will also allow Reliance Steel to penetrate into locations where it did not have a presence earlier. Moreover, the acquisition of Aluminium Services UK Limited will enable the company to expand its presence in the aerospace market. The buyout of Fox Metals and Alloys is also expected to strengthen Reliance Steel’s foothold in the oil and gas space which has been an attractive and growing market for the company. The buyout of Tubular Steel also boosts the company’s long-term growth strategy and strength by expanding its product portfolio and end market diversification.  
• Reliance Steel is seeing strength across aerospace, automotive and heavy equipment markets. Aerospace remains a strong market as manifested by healthy demand and pricing. Demand in this market is expected to be supported by higher commercial aerospace build rates. Aerospace accounted for around 10% of the company’s sales in 2015. Strong demand is also witnessed in the automotive market, backed by the company’s toll processing businesses in the U.S. and Mexico as well as increased use of aluminum in the industry. Reliance Steel expects sustained momentum across these markets in 2016. 
• Reliance Steel remains committed to offer incremental returns to its shareholders. The company, in February 2015, raised quarterly dividend by 2.8% to $0.40 per share. It paid dividend worth $120.1 million in 2015. Moreover, it bought back 6.2 million shares for $355.5 million in 2015. The company, in Oct 2015, adjusted its current share repurchase program and increased the number of shares to be repurchased under the authorization by 7.5 million along with extending the repurchase program through Dec 2018. The company has sufficient liquidity and cash flows to support dividend payouts and share buybacks moving ahead.  

Risks: 

• Reliance Steel’s non-residential construction market is its largest end market. However, it continues to be its weakest. While there has been a modest recovery of late, demand levels remains significantly below the peak level achieved in 2006. Some customers in the construction industry are in seasonal business. As a result, revenues in some months are lower due to reduced number of working days for shipments of products, resulting from vacation and holiday closures at some of its customers. In addition, the company’s business in the energy markets is expected to remain under pressure in the near term due to weak oil pricing. The company’s energy-related volumes tumbled 41% year over year in 2015. 
•  Reliance Steel’s operating results depend primarily on prices for and availability of metals. While the pricing environment has somewhat improved of late, weak metals pricing continues to weigh on the company's sales as witnessed in the most recent quarter. Prices for carbon steel products and nickel are expected remain soft in the near term. A significant decrease in carbon steel product prices from current levels may have an adverse impact on the company’s gross profit margins and profitability. 
• Reliance Steel remains challenged by the weak steel industry fundamentals. The U.S. steel industry has been hit by high levels of imports of cheaper steel products. Consumers in the U.S. are importing cheaper steel from China, forcing domestic steel producers to sell at lower prices, and sometimes even at a loss. The steel industry also remains affected by overcapacity which continues to outpace demand. There is not enough demand for steel products due to weakness in construction end markets, resulting in excess supply. Contributing towards this inventory glut are production ramp ups by domestic steel producers and rapid growth in Chinese production.  

Buy the stocks of Greif, Inc. (NYSE: GEF)

Summary: 

Estimates have been going up ahead of Greif’s third-quarter fiscal 2016 earnings release. The company has a positive record of earnings surprises in recent quarters. Greif expects its fiscal 2016 results to gain from implementation of transformation efforts. The company raised earnings per share guidance for fiscal 2016 to the range of $2.20 to $2.46. Further, Greif’s second half of the fiscal year is historically stronger due to seasonality, particularly tied to the agricultural markets. It will also benefit from sale of non-core assets, consolidation of facilities, investment in capacity and cost reduction activities. 

Reasons to Buy: 

  

• Greif raised earnings per share guidance for full-year fiscal 2016 to the range of $2.20 to $2.46, from the prior band of $2.10 to $2.40 per share. This excludes gains and losses on the sale of businesses, timberland and property, plant and equipment, acquisition costs and restructuring and impairment charges. The company expects fiscal 2016 results to continue to gain from further implementation of its transformation efforts. Further, the company’s second half of the fiscal year is historically stronger due to seasonality, particularly tied to the agricultural markets. 
• Even though the flexible products business (FPS) had an operating loss of $1 million in the second quarter, Greif expects the segment to deliver positive EBITDA in fiscal 2016. Further cost reductions, improvement in under-performing operations in specifically Turkey, Mexico and Vietnam and focusing on completion of the commercial initiatives will drive growth. 
• Greif has been successful in fixing under-performing businesses and divested non-core assets and closed facilities which will drive long-term performance. The company completed three divestitures in a period of six months ending April 30, 2016. The gain on the disposal of businesses was $2.8 million in the six month period. Greif also continues to accelerate headcount reductions, and slash entertainment and travel budget by increasing video conferencing usage and eliminating all non-sales related travel. These actions will be accretive to earnings. 
• Greif’s plans to expand gross margins are gaining traction. The company is executing process improvements in all commercial sourcing supply chain and operations. In addition, the company raised free cash flow range guidance to $130 million to $160 million. 
• Greif’s IBC business in North America had the best volume in past six quarters. The business continues to improve in fiber in spite of its largest customer plant being closed. The company started to enter into the seasonal agricultural markets which will be positive. Moreover, the ISM (Institute for Supply Management) index rose in June to 53.2 and it's been over the target expansion range of 50 in the past three months. 

Risks: 

• Greif’s fiscal 2016 results will be affected by a sluggish global industrial economy, weaker containerboard prices and the continued strengthening of the U.S. dollar compared to other currencies. 
• Even though Greif will benefit from its strategic transformation plans in the future, this has resulted in significant impairment and restructuring charges. During the second quarter fiscal 2016, Greif recorded restructuring charges of $5.4 million, consisting of $4.3 million in employee separation costs and $1.1 million in other restructuring costs, primarily consisting of professional fees incurred for services specifically associated with employee separation and relocation. The company has increased restructuring expense by roughly $5 million for the full year 2016. 
• Falling oil prices has a direct impact on demand for industrial packaging in the energy sector. A number of energy producers had cut exploration and production activities in response to sharply declining oil prices, especially the North America focused smaller companies. Lower oil prices have also started to impact the cost of Greif’s raw materials. 
• Industrial economy in Europe remained unchanged in the past six months. Greif witnessed slow and steady growth in the majority of EMEA region. Further, the company continues to see a very broad slowdown in China, which is particularly impacted by continued pressures caused by supply and demand imbalance in a lot of the commodity material sectors.The company also doesn't see any short-term relief in Brazil. This has negatively impacted steel drum business that serves the industrial sector. These factors remain headwinds in the near term. 

Buy the stocks of CMS Energy Corporation (NYSE: CMS)

Summary: 

CMS Energy’s investments in infrastructure development projects, replacement of aged infrastructure and application of smart technologies will enable it to provide reliable services to customers. The company's sustained efforts to expand its renewable portfolio are also impressive. However, stringent environmental regulations, volatile commodity prices and risks related to impending regulatory cases could deter growth. Moreover, weather variations tend to impact the demand for electricity and natural gas, thereby leading to a fluctuating performance. 

Reasons To Buy:

• CMS Energy’s regulated electric power operations in Michigan generate a relatively stable and growing earnings stream. It is currently focusing on several issues such as capacity maximization, reliability improvement, clean power generation and infrastructure upgrade. The company plans to spend $17 billion between 2016 and 2025, the majority of which will be directed toward infrastructure development projects. This includes $8.6 billion that has been allocated for 2020. These initiatives will enable the company to provide reliable services to its customers and achieve its long-term EPS growth target of 5–7% in 2016 and 6–8% in 2017. Moreover, capital investments have helped the company to reduce operation and maintenance costs by 4% over the 2014–2015 period. CMS Energy further projects to reduce these costs by at least 10% by 2018. 
• Under the electric utility operations, CMS Energy focuses on strengthening circuits and substations, replacing aging poles and installing smart meters. Between 2016 and 2025, the company plans to invest around $10.77 billion in its electricity operations, including roughly $3.41 billion for electricity reliability and distribution activities. Meanwhile, the company plans to invest around $5.3 billion through 2020 in its electricity operations, including roughly $2.0 billion for electricity reliability and distribution activities. The company expects overall sales growth of about 1% on a conservative side at its utility operations through 2020. 
• CMS Energy has a large natural gas system in place and plans to expand it over the next decade. The company plans to deploy around $6.23 billion for its projects under gas operations between 2016 and 2025. This ambitious growth plan includes $1.6 billion for the replacement of aging infrastructure and improvement of service reliability over the next five years. Addition of the Jackson gas-fired plant will add flexibility, while reducing operating costs. Major expansion of the Ludington Pumped Storage facility will further benefit the company’s portfolio. 
•  We appreciate CMS Energy’s sustained efforts to expand its renewable portfolio. In 2014, the company’s Consumers Energy unit achieved its renewable capacity target of 10% per year earlier than expected with the completion of the 111-MW Cross Winds Energy Park. At 2015 end, Consumers Energy had wind and hydroelectric generation capacity of 34 MW and 1,069 MW, respectively. Through 2020, the company plans to spend around $0.7 billion on environmental programs required to comply with state and federal laws and regulations. In addition, CMS Energy continues to expand its solar operations. In Apr 2016, the company brought on-line the first large-scale solar project at Grand Valley State University. The company is constructing a second site at Western Michigan University, which is expected to commence operations by the end of 2016 summer. A site in the Lansing area is also under consideration. By the end of 2016, the company plans to have 10 MW of utility scale solar on its system. These additions will increase its renewable energy share above 10% that was mandated in the 2008 energy law. 
• CMS Energy maintains a stable liquidity position, besides exhibiting a strong cash generating capacity. As of Mar 31, 2016, cash and cash equivalents were $177 million. In the first quarter, the company generated cash of $632 million from operating activities. Besides investing in infrastructure projects, a favorable financial position enables CMS Energy to pay dividends at regular intervals. In Jan 2016, the company increased its quarterly dividend to $0.31 per share, up 7% from $0.29, maintaining a dividend payout ratio of 62%. The company expects dividend growth to be in line with its EPS growth guidance of 5–6% for 2016 and 6–8% for 2017. This initiative will enable the company to retain investor interest in the stock. 

Risks:  

• Despite executing several pollution-control measures at its power generating facilities, increasing stringency of environmental regulations on curbing carbon emissions during electricity generation remains a major concern. At present coal accounts for about 33% of its total generation mix. Meeting environmental regulations require the company to invest increasingly in low emission infrastructure at its generation systems that would in turn affect its margins.
• CMS Energy’s businesses are sensitive to commodity prices. An upward movement in fuel prices could increase the company’s cost of operations.
• Adverse decisions in regulatory cases may negatively impact CMS Energy’s earnings. Profitability of regulated utilities depends upon rate relief at regular intervals in Michigan. Although the company can self-implement its requested rate hike for six months, an adverse rate case decision will force the company to refund the incremental bill charged to its customers. 
• Weather conditions have a significant impact on the demand for electricity and natural gas. A milder winter or a cooler summer in CMS Energy’s service territories results in reduced utility usage, thereby affecting its financial performance. 

Buy the stocks of Boston Scientific Corporation (NYSE: BSX)

Summary:

We remian optimistic about Boston Scientific's recently introduced global restructure plan, the execution of which will result in fulfillment of its margin leverage goals and help Boston Scientific produce low-to-mid-teens EPS growth, ahead of the industry average. Boston Scientific is currently leaving no stone unturned to strengthen its core businesses and invest in new technologies and global markets, which accounted for the sales upside across all its geographies in the first quarter. Moreover, we are encouraged with the company gaining a number of approvals for its products. The company’s Urology business is also gaining traction from the AMS urology portfolio acquisition. However, apart from a difficult foreign exchange scenario, we are concerned with the disappointing performance of the company’s core CRM segment with worldwide pacemakers and defibrillator sales declining over the past few quarters. 

Reasons to Buy:

Progress on Restructuring Initiatives: Boston Scientific’s restructuring plan is aimed at addressing financial pressures in a changing global marketplace, strengthening operational effectiveness and efficiency, and supporting new growth investments. Major actions under this plan include continued implementation of the company’s ongoing Plant Network Optimization (PNO) strategy (aimed at simplifying our manufacturing plant structure, reducing manufacturing costs and improving gross margins), consistent focus on driving operational efficiencies and ongoing business, and commercial model changes among others. According to Boston Scientific, the PNO strategy has simplified its manufacturing plant structure by shifting certain production lines among facilities. The full benefit of PNO, which has already been completed, should start to reflect in the company’s Rhythm Management adjusted operating margin through the second half of 2016. This restructuring program is also expected to result in total pre-tax charges of approximately $255–$270 million. The program is aimed at generating savings, a part of which will be reinvested in the company’s strategic growth initiatives. Benefits from this program should strengthen the business over the coming years. The company looks to benefit from this growth-driven initiative over the long term. 

Encouraging Near to Longer-Term Growth Plan: In May 2015, Boston Scientific announced its latest near-to-longer term growth plan. As an extension to the company’s 2014 restructuring strategy, the current plan aims at driving mid-single-digit organic revenue growth and consistent adjusted operating margin expansion. This in turn will lead to double-digit adjusted EPS growth at constant exchange rate or CER. The detailed growth plan includes meaningful innovation; global collaboration; continued focus on driving operational efficiencies; and ongoing business and commercial model changes. The company is also focusing on expanding globally and creating emerging market scale on new R&D capabilities, local partnerships and branding. It estimates emerging market contribution to increase from 10% in 2014 to 15% by 2017. Other activities under the plan involve rationalizing organizational reporting structures to streamline various functions, eliminate bureaucracy, increase productivity and better align resources to business strategies and marketplace dynamics. 

Focus on Emerging Markets: An important part of Boston Scientific’s growth strategy is to continue pursuing development opportunities outside the U.S. by expanding global presence, inclusive of the emerging markets. Against the backdrop of flattening or declining sales growth in developed markets like the U.S. and Europe, Boston Scientific is gradually strengthening its presence in the emerging markets, in countries like Brazil, Russia, India and China (BRIC). In first-quarter 2016, business from the emerging markets registered a robust 21% organic growth rate, ahead of the company’s target of reaching 15% of sales by 2017 from 8% in 2013. This encouraging performance was driven by 19% growth in China in the reported quarter. The company is gaining strong ground in India as well. It is currently targeting about 10 emerging markets for additional emphasis. Boston Scientific hopes to sustain its strong overall international performance taking into consideration several key new product launches that are in the early stages of their rollout. The company is also optimistic about its core cardiology segment which is gradually stabilizing with growth in the BRIC nations. The cardiology capacity in China is expected to double by 2017. In India, business is projected to grow more than 15% annually. 

Mayo Clinic Deal-to Add Value: In a major step to boost its entire medical device wing, Boston Scientific has collaborated with Mayo Clinic, a renowned nonprofit organization that works on medical research and education. Taking into consideration the latest temporary freezing of the 2.3% medical device tax, which had earlier taken a toll on the entire medical device sector discouraging research and development, this partnership is expected to prove important for Boston Scientific. The collaboration agreement states that Boston Scientific engineers and Mayo Clinic physicians have already been working together to develop new medical technologies in areas such as interventional cardiology, heart rhythm management, endoscopy, neuromodulation, urology and pelvic health. Both Boston Scientific and Mayo Clinic are optimistic about this alliance, which they hope should not suffer any longer owing to investment issues. The amount earned from the temporary tax repeal can now be channelized for reinvestment in this collaboration. We accordingly expect to see a massive productivity boost for Boston Scientific in the coming quarters. 

Impressive Value-adding Acquisitions: We are impressed with Boston Scientific’s recent acquisitions that have added several products (though many are under development) with immense potential. This, in turn, should help boost the top line in the long term. In Nov 2015, Boston Scientific acquired the interventional radiology portfolio of CeloNova Biosciences, a San Antonio-based developer of endovascular and interventional cardiology technologies. According to the company, CeleNova is a synergistic tuck-in acquisition focused on the treatment of liver cancer via localized delivery of chemotherapeutic agents. Earlier in Aug 2015, the company acquired the American Medical Systems (AMS) urology portfolio, including the Men's Health and Prostate Health businesses of Endo International. Other recent acquisitions include Xlumena buyout which should help enhance Boston Scientific’s position in the field of interventional endoscopic ultrasound or EUS therapeutics; the Interventional Division of German healthcare major Bayer AG and IoGyn, Inc. – a pre-commercial stage company. 

High Urology Potential with AMS' Urology Suit: Boston Scientific believes the recently completed acquisition of the AMS urology portfolio will nearly double the size of its urology business to $1 billion. This is expected to bring in significant synergies and solid growth prospects through portfolio innovation and international market expansion. As part of Boston Scientific's Urology and Women's Health, this business should strengthen the company's leadership in the urology device category globally while also providing strong shareholder returns. Urology represents attractive global market potential of $4 billion with large unmet patient needs and considerable international expansion opportunities. We believe the acquisition presents significant potential to the company to capitalize on this opportunity. 

Risks:

CRM Continues to Remain a Drag: Sluggish CRM sales over the recent past continue to weigh on Boston Scientific's results. The first quarter remains no exception to that with disappointing performance in the company’s worldwide pacemakers and defibrillator sales. We note that, at the beginning of 2015, Boston Scientific predicted a slowdown in worldwide CRM sales for the entire year due to replacement cycle headwinds and competitive launches in the U.S. The company earlier anticipated softness in U.S. CRM sales to continue even in the first quarter of 2016. Although the company is currently expecting a rebound in its CRM performance in the second quarter and second half 2016, we remain on the sidelines based on the challenges the company is still facing in this business, especially in the U.S. 

Exposure to Currency Movement: With Boston Scientific recording 47% of its sales from the international market, it remains highly exposed to currency fluctuations. Unfavorable currency movements have been a major dampener during the fourth quarter, as in the case of other important MedTech players too. With the trend likely to linger, the company’s revenues are expected to be hit by fluctuations in foreign exchange rates, going forward. In the first quarter of 2015, foreign exchange headwind impacted the company’s adjusted earnings by $0.10 a share. Considering this impact, for 2016, Boston Scientific expects currency headwind to the tune of approximately $100 million on revenues or $0.05?$0.06 per share on adjusted earnings relative to the year-ago quarter.

Legal Matters Hampering Growth: Boston Scientific recorded net litigation-related charges of $456 million in 2015. This relates to the increase in the company’s litigation reserve for a recent appellate court ruling in Maryland in the Mirowski case. The remainder relates to a combination of increases in our transvaginal surgical mesh product liability reserves and other adjustments. Such legal costs, when accrued over time, may substantially impact the company’s operating results and cash flows. 

Competitive Landscape: The presence of a large number of players has made the medical devices market highly competitive. The company participates in several markets, including Cardiovascular, CRM, Endosurgery and Neuromodulation, where it faces competition from large, well-capitalized companies such as Johnson & Johnson, St. Jude, Medtronic, Stryker, Smith & Nephew and Edwards Lifesciences, apart from several other smaller companies.