Who says that stocks do not have a history? As we can see from the long-term chart of Boston Scientific Corporation (NYSE:BSX) below, shares have come right back up against their 2004 highs. Just from a technical standpoint (Monthly RSI is diverging against price), it looks like Boston Scientific’s share price is not going to be able to break through resistance at this present moment in time. Although earnings projections continue to look bullish going forward, long holders of BSX will obviously want to know if there is going to be a sustained move downward in the share price.
When assessing companies, we invariably like to look at the financial condition of the company. Boston Scientific Corporation’s top line has increased by almost 10% on average per year over the past 3 years whereas the firm’s operating profit has grown by almost 19%. Therefore, let’s go through the key financial metrics of the balance sheet (and more importantly their trends) to see if this growth has been internally driven or not.
Boston Scientific’s “Cash & Short Term Investments” position came in at $277 million in its latest quarter. Although the trend in this metric has been declining over the past decade, it is fair to say that Boston Scientific ($59 billion market cap company) does not carry a lot of cash compared to its size.
Receivables came in at almost $1.8 billion in its latest quarter, which is up from $1.37 billion a decade ago. Sales in the same period rose from $8.2 billion to $10.4 billion over a trailing twelve-month average. Therefore, growth in receivables is tracking slightly higher than top-line growth. We like to see growth in receivables track slightly lower than sales if at all possible over the long run.
Inventory, though, is tracking at a much faster clip than both receivables and sales. In fact, inventory has grown from $891 million in ’09 to a present $1.566 billion. Inventory has actually grown by $400 million just in the past few quarters. This is a worrying sign (especially if the trend is re-accelerating), but the problem seems to be masked by the firm’s impressive top-line growth of late.
The current ratio therefore of 1.14 may look stable but investors should remember that inventory makes up over 32% of the firm’s current assets at present.
When we move on to the non-current assets, we can see that Boston’s “Gross Property, Plant & Equipment” has increased by 63% over the past decade to hit $5.3 billion in its latest report. Revenue is up around 27% over the same time period. Less is more for this line-item in our opinion. Why? Because if Boston needs to keep on spending to maintain top-line growth, it doesn’t bode well for future growth if the firm had to slow down its spending, which incidentally could easily happen if economic conditions were to change.
Goodwill and intangibles of around $18+ billion are at a similar level to what we had in ’09. Together, though, they make up 68% of Boston’s combined amount of assets ($26.75 billion). Goodwill is the “fat” Boston has paid on its acquisitions up to now whereas its intangible assets are assets that cannot be touched and are priced at their fair market value.
Long-term debt hit almost $9.6 billion in the company’s latest report. This means that it has increased to approximately 5.6 times operating profit, which again is above average. Shareholder equity has dropped by about $2.6 billion over the past decade as it came in at $9.6 billion in the company’s latest report.
Suffice it to say, Boston’s book multiple of 6.1 is the highest it has been over the past decade. The net worth of the firm has not increased as the firm’s market cap has, for example, especially since 2012. Therefore, there is every possibility that the recent top in the share price may indeed end up being a multi-year top. Eventually, valuations revert to their mean even if future earnings growth numbers look really attractive at present. As chartists, we believe that this projected growth has already been baked into the share price action. Therefore, something seems to be amiss at present. Let’s see what the fourth quarter brings.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.