It's fun to be right about a stock and I picked a real winner. Since I wrote about it on Nov. 11, 2010, this stock's value has soared more than 35%, from around $39 a share to $53, compared with barely a 10% gain for the S&P 500.
But the point really isn't to toot my own horn. It's that the stock still has plenty of room to run despite the recent surge. I project an additional increase of at least 40% during the coming two to three years, making the holding a timely "buy" even if you missed out on the last five months of gains.
For details on what initially drew me to St. Jude Medical (NYSE: STJ), be sure to read my initial analysis. Everything I said about it then applies now.
Here's why I think St. Jude will continue to be a winner:
1. It progressively diversifies. After gaining fame 35 years ago for creating an artificial heart valve to replace diseased valves in people with bad hearts, St. Jude branched out and now offers an array of products for use in heart surgery, cardiovascular disease and neuromodulation. Neuromodulators are spinal cord-stimulating devices that treat chronic pain. They also have potential in the treatment of psychological and neurological ailments such as Parkinson's, depression and epilepsy.
2. It keeps innovating. The latest big news: the March 22 announcement of a new implantable cardioverter defibrillator (ICD) to be introduced later this year for the treatment of arrhythmias, irregular heartbeats that impair blood circulation. The device, once implanted in the body, emits charges that help maintain a steady heartbeat.
Of course, ICDs have been around a while. But this one is such a significant technological advance -- it's smaller, safer, and quicker to recharge than previous models -- that it should rapidly become the standard of care in ICDs.
St. Jude also recently got Food and Drug Administration (FDA) approval for two new ablation catheters -- thin, flexible tubes used to treat arrhythmias. The catheters deliver targeted energy bursts to specific areas of the heart, essentially producing scars that interrupt the abnormal electrical signals that contribute to arrhythmias.
Like ICDs, ablation catheters are nothing new. But here again, St. Jude has improved the technology by making its catheters more maneuverable. This will allow doctors to position them and deliver energy bursts with greater precision.
3. It's expanding globally. Most recently, St. Jude opened a technology center in Beijing, where doctors can perform "virtual" product testing. The firm now has 250 employees at sales offices in three Chinese cities, maintains about two dozen manufacturing facilities worldwide and boasts a significant presence in more than 100 countries in North America, the Middle East, Latin America, Eastern and Western Europe, and Asia. Global expansion is crucial because foreign sales, especially in emerging and frontier markets, will be a progressively larger source of future sales.
4. It's growing sales and earnings. Forecasts call for earnings of $3.30 a share this year, a gain of about 10% compared with last year, followed by 11% to 12% growth from 2012 to 2016 as the global economy improves. The divisions housing the neuromodulators and ablation catheters should do especially well, advancing sales at nearly 15% annually.
However, the biggest top-line boost is expected from AGA Medical, a firm St. Jude acquired last October for $1.1 billion in cash and stock. There, sales may well grow at 20% or more annually on demand for AGA's unique cardiac surgery tools designed to correct heart defects through minimally invasive procedures. Strong demand is also expected for AGA's blood vessel plugs, which are used to block blood flow to tumors and reduce pressure on weakened blood vessels.
5. It's paying shareholders. In February, St. Jude's board approved the firm's first-ever cash dividend -- $0.21 a share each quarter, which translates to an annualized dividend yield of 1.6%. The dividend, which will begin on April 29 to shareholders of record on March 31, suggests St. Jude has achieved a scale where it can return a portion of earnings to shareholders while still investing in long-term growth. According to management, share buybacks are also a near-term possibility.
Free cash flow is $700 million, slightly more than when I first wrote about St. Jude five months ago. At 0.5, its debt-to-equity ratio still mirrors the industry mean.
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