Earnings Preview: Boston Scientific

Zacks

Boston Scientific (NYSE:BSX - News) is scheduled to release its fourth quarter and fiscal 2011 earnings on Thursday, February 2, 2012, before the market opens. The company is expected to report EPS of 8 cents on revenue of $1.908 billion for the quarter and EPS of 44 cents on revenue of $7.662 billion during the fiscal, according to the Zacks Consensus Estimates.

As per the guidance provided with third quarter results, Boston Scientific expects to report adjusted EPS of 8–11 cents on revenue of $1.85−$1.95 billion during the quarter and 44−47 cents on revenue of $7.624−$7.724 billion during the fiscal.

Previous Quarter Highlights

Boston Scientific reported an EPS of 9 cents during the third quarter of fiscal 2011 compared with 12 cents in the year-ago period. However, after considering certain adjustments (other than amortization expense), the adjusted EPS came in at 10 cents beating the Zacks Consensus Estimate of 8 cents, but missing the year-ago quarter’s adjusted EPS of 12 cents.

Revenues declined 2% year over year to $1.874 billion during the quarter and missed the Zacks Consensus Estimate of $1.906 billion. Excluding the impact of foreign currency and sales from divested businesses, net sales dropped 3%. Moreover, gross margin declined to 63.7% from 67.5% in the year-ago quarter.

The company has adopted a restructuring program to strengthen its operational effectiveness, increase competitiveness and support new investments. Consequently, about $19 million ($29 million pre-tax) of restructuring charge was recorded during the quarter.

Agreement of Analysts

Estimate revision trends among the analysts for the fourth quarter and the fiscal have been on the downside. Over the last 30 days, out of 22 analysts covering the stock, 5 lowered their estimates for the quarter while only 1 moved in the opposite direction. A similar situation applies to the fiscal with 6 downward revisions over the past month and none raising their estimates.

The decline in estimates reflects the issues troubling the company’s core businesses and the current economic uncertainties. This is all the more evident in St. Jude Medical’s (NYSE:STJ - News) recently reported results. Revenues from its CRM division fell 6% at constant exchange rates ("CER") year over year to $728 million, indicating sustained softness in the CRM market.

The US defibrillator market remains an overhang for Boston Scientific and its peers, St Jude Medical and Medtronic (NYSE:MDT - News). This business has been affected by physician reaction to a study result published by the Journal of the American Medical Association regarding evidence-based guidelines for ICD implants and US Department of Justice’s investigation into hospitals' ICD implants.

However, the company has adopted a restructuring program to strengthen its operational effectiveness, increase competitiveness and support new investments. We expect an update from the company regarding this initiative. Boston Scientific is also looking at strengthening its foothold in the emerging markets and launching new products with potential to drive its top line. 

Magnitude of Estimate Revisions

For the fourth quarter, estimates have remained unchanged at 8 cents over the last 30 days. For fiscal 2011 however, the consensus estimate dropped by a penny to the current level of 44 cents per share over the past 1 month.

Recommendation

Boston Scientific continues to focus on strategic initiatives to drive growth and profitability. Moreover, the company is working on strengthening its portfolio and targeting suitable acquisitions in areas of unmet medical needs. The restructuring initiatives undertaken should also lead to improvement in the bottom line.

However, we continue to remain concerned about its core business where the company is witnessing significant pricing pressure and loss of market share. Besides, economic uncertainty is impacting procedure volume. Longer term, we have a Neutral recommendation on Boston Scientific. The stock retains a Zacks #3 Rank (“Hold”) in the short term.

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