Medical devices giant St. Jude Medical, Inc.’s (STJ) recently announced that it will be offering 3.25% senior notes due 2023 for an aggregate purchase price of $900 million, and also 4.75% senior notes due 2043 for an aggregate purchase price of $700 million.
The net proceeds will be used primarily to redeem its earlier debts via the 3.75% senior notes due 2014, of which $700 million is outstanding, as well as the 4.875% senior notes due 2019, of which $500 million is outstanding. The company may also use the proceeds for general corporate purposes, including repayment of short-term loans.
St. Jude’s debt-to-capital ratio at the end of the fourth quarter of 2012 was 38.4%. Following the completion of the offerings, the new ratio will be 50.3%. Moreover, net interest expenses in 2012 were $73 million. The current favorable interest rate environment should help the company lower interest expenses going forward.
Given St. Jude’s strong cash balance, we believe that the company will be able to meet its interest obligation. The company exited the 2012-fourth quarter with cash and cash equivalents of $1,194 million, up 21.1% from the previous-year quarter. Long-term debt decreased 6% year over year to $2,550 million. Additionally, STJ generated $1,335 million of operating cash flow in 2012, up 3.7 year over year.
St. Jude has a Zacks Rank #3 (Hold). The company’s fourth-quarter adjusted earnings per share of 92 cents rose 7% from the prior year and topped the Zacks Consensus Estimate by 2 cents.
The company’s strong business fundamentals coupled with new products are expected to drive long-term growth. However, softness in the core Cardiac Rhythm Management (“CRM”) market and the noise surrounding its high-margin ICD leads are likely to keep revenues under pressure.
While we remain on the sidelines regarding St. Jude, medical products companies such as Covidien (COV), Abaxis (ABAX) and CareFusion (CFN) appear impressive. All these stocks carry a Zacks Rank #2 (Buy).
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