What Drove A Nearly 2x Rise In Boston Scientific’s Profits?

Boston Scientific (NYSE: BSX) saw its net income expand by $0.9 billion or 145% y-o-y to $1.6 billion in 2023. This can primarily be attributed to an expansion of its operating margin and lower taxes. In this note, we discuss Boston Scientific’s margin profile along with its stock performance, over the last three years.

Firstly, let us look at Boston Scientific’s stock performance. BSX stock has seen extremely strong gains of 115% from levels of $35 in early January 2021 to around $75 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. BSX is one of a handful of stocks that have increased their value in each of the last three years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 18% in 2021, 9% in 2022, and 25% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that BSX underperformed the S&P in 2021.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BSX face a similar situation as it did in 2021 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, we think Boston Scientific is fully valued. We estimate Boston Scientific’s Valuation to be $70 per share, slightly below its current levels of $74. At its current levels, BSX stock is already trading at 32x forward expected earnings of $2.34 per share in 2024. The 32x P/E multiple is slightly higher than the average of 28x seen over the last five years.

Boston Scientific Has Seen Its Gross And Operating Margins Expand In Recent Years

Boston Scientific’s gross profit rose from $6.4 billion in 2020 to $9.9 billion in 2023. Its gross profit margin expanded from 64.6% to 69.5% over this period. Similarly, Boston Scientific also saw its operating margin expand from 6.9% in 2020 to 17% in 2023, and further to 17.2% for the last twelve months period. Although the company increased its expenditures on R&D and SG&A, with combined expenses of these two rising 34% between 2020 and 2023, this growth was lower than the 44% rise in total revenues.

Net Income Margin Is On The Rise

Along with the expansion of gross and operating income, the company saw its net income rise from $(115) million in 2020 to $1.6 billion in 2023. This can primarily be attributed to the company’s increased sales as well as its disciplined spending. On an adjusted basis, net income margin has expanded from 13.9% in 2020 to 21.1% in 2023. This resulted in earnings surging from $0.97 to $2.05 on a per share and adjusted basis over the same period. Furthermore, the company’s outlook for 2024 is solid. The top-line is expected to be in the range of $15.8 billion and $16.1 billion in 2024, reflecting a 12% y-o-y growth at the mid-point of the range. Boston Scientific’s revenue growth is expected to be driven by an overall rise in procedure volume, aiding growth for its MedSurg as well as Cardiovascular segment sales. Furthermore, Boston Scientific’s recent acquisitions of Apollo Endosurgery, Relievant Medsystems, and a majority stake in Acotec have bolstered its top-line growth lately, a trend expected to continue going forward. The company expects its adjusted earnings per share to be in the range of $2.29 and $2.34, implying a 13% y-o-y rise at the mid-point of the provided range.

Given the current procedure volume growth, Boston Scientific should be able to continue to expand its operating margin with disciplined spending. Although a better margin profile will also bode well for its stock, we think BSX stock is appropriately priced now, and investors willing to enter will likely be better-off waiting for a dip.

While BSX stock looks fully valued, it is helpful to see how Boston Scientific’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 5/21/2024
[2] Cumulative total returns since the end of 2016

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