Healthcare St. Jude Medical, Inc. (NYSE: STJ)

Krause Fund Research
Spring 2016
St. Jude Medical, Inc.
(NYSE: STJ)
Healthcare
Recommendation: HOLD
April 19, 2016
Analysts
Taylor Wingert
[email protected]
Adam Busta
[email protected]
Alex Junk
[email protected]
Manman Tai
[email protected]
Company Overview
St. Jude Medical Inc. (STJ) is a global medical device
company involved in developing, manufacturing, and
distributing cardiovascular medical devices for the
management of chronic pain and movement
disorders. The company was founded in 1976 and is
headquartered in St. Paul, Minnesota, with its
principal geographic locations found in the United
States, Europe, and Asia Pacific. Since 2013, St.
Jude has acquired four companies including
Thoratec, NeuroTherm Inc., Endosense SA, and
Spinal Modulation Inc.37
Stock Performance Highlights
52 week High
52 week Low
Beta Value
Average Daily Volume
$80.84
$48.83
1.212
2.03 M
Share Highlights
Market Capitalization
Shares Outstanding
Book Value per share
EPS (ttm)
P/E Ratio
Dividend Yield
Dividend Payout Ratio
Price per share (as of 4/18/2016)
$16.64 B
283.67 M
$14.26
$3.07
17.98
1.79%
37.74%
$58.65
Current Price $ 58.65
Target Price Range $ 58 - $ 66
STJ Lags Competition
• M&As and R&D investments are both catalysts for growth
in the health care sector. STJ has consistently invested more in
R&D as percentages of sales than their two biggest
competitors. STJ acquired Thoratec in 2015, and the company
is better off strategically with this acquisition and is offering
more comprehensive products for heart failure patients.
• STJ underwent a “business realignment plan” over the past
five years. They incurred over $160 million in costs for these
realignment plans and have yet to realize these gains.43
• STJ has not come up with a tissue heart valve product yet
and is losing market share in the heart valve space. They
currently only offer mechanical valves.
• The launching of the MRI-safe CRT-D product early next
year would provide an opportunity for STJ to gain market share
back in their CRM division which was down nearly 10% in
2015.
• The Affordable Care Act will have a material impact on
revenues. The focus has shifted from fee-for-service to fee-forvalue. STJ’s CardioMEMS device is one of their best selling
products in the CRM market, and they have had trouble
receiving reimbursement from private insurers.
One Year Stock Performance
Company Performance Highlights
ROA
ROE
Sales
6.86%
20.90%
$5.54 b
Financial Ratios
Current Ratio
Debt to Equity
Profit Margin
1.32
158.14
15.88%
Source: Yahoo Finance33
1
Economic Analysis
For our economic analysis of the health care sector, our
team determined the following five economic variables as
the most significant: unemployment, gross domestic
product (GDP), government changes, interest rates, and
demographics.
Unemployment
Unemployment is an economic factor in the health care
sector that significantly affects who demands health care,
whether or not there will be enough supply to meet
demand, and who is qualified and willing to pay for
health insurance. Only 55% of adults make use of
preventive health care options while only approximately
50% of adults choose to take advantage of general health
care.3 Today’s critical preventive health care resources
include mammograms, pap tests, colorectal cancer (CRC)
scope exams, prostate-specific antigen (PSA) tests, digital
rectal exams, annual checkups, and seasonal influenza
vaccinations.3 With STJ in the medical equipment and
supplies industry, demand for preventive health care can
affect the demand health institutions have for STJ’s
products required for these preventive tests. Therefore,
the demand for preventive care is critical to STJ’s
success.
The correlation between the unemployment rate and rate
of preventive health utilization is also significant, with a
one percentage point increase in unemployment leading
to 0.0196 (1.58%) fewer preventive health care resources
used by the population.3 This relationship shows that
during periods of low unemployment, more preventive
health care resources are likely to be utilized, and more
patients, hospitals, and health institutions will demand
medical equipment and supplies from STJ. The
correlation between the unemployment rate and
preventive health care use while controlling for the
availability of health care services is also worth noting. A
one percentage point increase in the unemployment rate
results in a decrease in average state health care
employment by 760 jobs, indicating that there are
relevant signs of cyclicality in the health care sector.3 In
addition to the patients who need STJ’s products, health
care employment is also directly tied to the demand of
STJ’s products and is a critical variable in the health care
system.
The unemployment rate also has significant connections
to health insurance. Health insurance helps the population
receive proper medical attention and helps pay for this
medical attention. Individuals without health insurance
are normally in worse condition in comparison to those
with health insurance. The Patient Protection and
Affordable Care Act (PPACA) was passed in 2010 in an
effort to change this imbalance, raising public health
insurance qualifications while encouraging employerprovided health insurance.7 A negative relationship also
exists between the unemployment rate and probability of
having health insurance. For adult males, a rise in
unemployment by one percentage point equates to a 1.67
percentage point decrease in the probability of having
health insurance from any source, a 1.00 percentage point
decrease in the chance of having company-paid health
insurance, and a 1.44 percentage point decrease in the
probability of the individual buying health insurance
protection independently.7
Consequently, the unemployment rate is a key factor in
health insurance protection. Individuals without health
insurance will be less likely to afford STJ products. More
importantly, STJ products will not be able to reach the
uninsured population, further limiting their value and use.
Large fluctuations in the unemployment rate can also
provide many positive and negatives for the healthcare
sector. The Great Recession from December 2007 to June
2009 caused the US unemployment rate to soar from
5.0% to 9.5% as illustrated below.7
Source: Periodot47
This 4.5% increase equated to 9.3 million citizens (7.1
million men, 2.2 million women) aged 18-64 years old
losing health insurance over the course of the Great
Recession.7 Therefore, the issue with unemployment and
health insurance is that the population does not
necessarily control whether they are insured. The
unemployment rate dictates the economic conditions that
determine whether or not employers can provide
insurance or if the population can independently afford
2
insurance. The following graph demonstrates the sharp
rise in the percentage of uninsured correlated with the
unemployment rate throughout the duration of the Great
Recession.
job creation has been on the rise since 2010, boosting the
economy and steadily decreasing the unemployment rate.
STJ ranks below Medtronic and Boston Scientific
Corporation in many product categories so the addition of
more jobs in health care will only help spur demand for
its medical equipment. An additional and useful metric is
the Insured Unemployment Rate (IUR) defined as the
percent of the labor force eligible to receive
unemployment insurance benefits.24 An increase in
unemployment stems from an increase in IUR. The IUR
has steadily dropped since 2008, and the unemployment
rate is expected to follow suit.24 Our team believes the
unemployment rate will stay relatively stable the next two
years, slightly increase in 2018, and then decrease back to
5.0%. While the ACA transitions the healthcare system
from fee-for-service to fee-for-value55, hospitals should
see less volume. Due to the required enrollment however,
more individuals may receive the necessary medical
attention provided by STJ’s medical equipment and
supplies.
Source: Center for American Progress Action Fund53
During the post-recession period, the percentage of
uninsured also continued to rise, but the increase was not
as sharp as during the recession. Another observation is
that the uninsured rate slightly rose after ACA
enforcement, meaning that the Affordable Care Act did
not change the relationship between unemployment and
health care as much as government would have liked.
However, the effects of the ACA were also likely masked
by the post-recession recovery that was still occurring
during ACA approval. The sharp drop in the uninsured
did not occur until the end of 2013, when the percentage
significantly dropped over one year as shown below.
Source: Forbes49
Gross Domestic Product (GDP)
Source: Gallup48
Since the Great Recession, the economy has made a
considerable comeback. The following graph shows that
Gross Domestic Product (GDP) is a commonly used
economic metric that measures the market value of all
goods and services produced. Around 17.5% of GDP
spending in America came from health care. The
following graph demonstrates that in comparison to other
countries, the US clearly spends the most on health care
and is well above the rest of the world. In recent years,
legislative reform like the Affordable Care Act (ACA) as
well as the Great Recession have had tremendous
3
influence on health care spending. The timing of the ACA
implementation and the economic recovery has
complicated the relationship between GDP and health
expenditures, most notably from 2013 to 2015. Health
care spending grew 4.5% from 2013 to 2014 due to
coverage expansions from the Affordable Care Act.
Health care spending grew 5.5% in 2015, representing the
largest increase in spending since 2007.5 As of July 2015,
approximately 8.4 million Americans are estimated to
have acquired health insurance through the ACA.4 This
enrollment is good news for STJ as they continue to
develop medical devices for adults and the baby boom
generation.
Source: KFF2
Actual and projected growth in health care spending
Source: The Wall Street Journal50
Excess health spending growth adjusted for GDP and
inflation from 1965 to 2011 is illustrated by the following
graph. From 1965 to 2011, inflation adjusted GDP
explained 85% of the variation in health care spending.2
Changes in health care spending frequently lag behind
changes in real GDP and are usually more extreme, with a
1% change in real GDP leading to a 1.49% change in
health care spending.2 This relationship indicates that
health care spending grows faster than the economy and
benefits STJ and the medical equipment and supplies
industry in most respects. From 1997-2002, real GDP
grew 3.4% on average, and from 2001-2003, health
spending grew 8.8% on average. From 2007-2012, real
GDP only grew 0.8% on average, and health care
spending fell and averaged approximately 4.2%. From
1960-2011, health care spending has grown 2.6% faster
than GDP.2 The relationship between GDP growth and
health expenditures complicates the corresponding
effects. An increase in health care expenditures as a
percent of GDP helps the health care sector and STJ yet
burdens the US government with significant expenses
including Medicare, Medicaid, and social security
expenses that account for a majority of the government
budget.
according to components of GDP and inflation are
illustrated by the following chart. Health care
expenditures are predicted to increase 6% per year on
average for the next 10 years due to ACA expansion and
an aging demographic.6 The corresponding increase in
expenditures with an older population is key for STJ
because many of their products are directed to the older
population that will require medical equipment. Increased
expenditures can expose the health care industry to
increased government supervision. A rising concern for
policy makers and economists has been the
disproportionate amount of GDP allocated to health care.
Even though the US is devoting too many resources to
health care compared to many other developed nations,
the health care system in the United States is among the
poorest performers on different health care metrics.25 The
ACA is expected to decrease the number of people
without health insurance in this country by 30 million
before 2023, creating market opportunities for the entire
health care sector along with STJ and the medical devices
industry.8 In terms of overall GDP growth, our
expectations are GDP will grow around 2.6% in 2016 and
will slowly decrease to 2% by 2020.3 Our analyst team
believes GDP will be fairly consistent over the next five
years.
Source: KFF2
4
Government Changes
The US government has been very influential on the
health care sector with the power to create, manipulate,
and revise the regulations associated with the health care
system. The regulations affect the revenue and costs of
STJ. The most recent influential legislation in health care
occurred in 2010 when the Patient Protection and
Affordable Care Act (PPACA) was enacted. The result of
this legislation increased the amount of Americans
enrolled in health insurance plans. 11.7 million
Americans are expected to have enrolled during the 2015
enrollment period.17 The ACA enactment has resulted in a
decrease in the number of uninsured Americans as
represented by the following graph. About 11.4% of
Americans were uninsured in 2015, down from 14.6% in
2008.17 As of July 2015, 8.4 million Americans are
estimated to have acquired health insurance through the
expanding ACA. As more and more Americans receive
insurance, government regulations will undoubtedly
become stricter due to a tighter money supply.4
Source: White House51
Supplementing the ACA are new costs enforced on
companies in the health care sector that offset generated
income from more Americans paying for health
insurance.10 Health care spending grew 5.5% in 2015,
becoming the largest increase in spending since 2007.
Future costs that will impact the healthcare sector include
the Cadillac Tax of January 2018, a planned excise tax of
40% to employers who provide their employees with
high-cost health benefit plans.16 The goal of the tax is to
try and eliminate excess health care spending. The tax
will also be used to help pay for ACA expansion. On top
of the 2.3% tax on most of STJ’s medical devices, the
Cadillac tax could further limit STJ from offering its
employees large health benefit plans in the future which
would have a negative effect on the company.
Source: Centers for Medicare and Medicaid Services
As time passes, health spending at both the state and local
levels will increase. Due to ACA coverage expansions
and premium subsidies, state and local governments are
projected to account for 47% of health spending by 2024,
an increase of 4% from 2013.15 The ACA is expected to
decrease the number of individuals without health
insurance in the US by 30 million before 2023. Around
19.1 million people are also projected to register for
Medicare during the next eleven years. Medicare
spending is projected to grow at 7.4% from 2015 to 2022
due to a growth in enrollment from the aging population.8
An increase in Medicare spending will have positive
effects on STJ’s product line as many of their products
are intended for use by the aging population. However,
stricter regulations, tighter budgets, and a focus on quality
for care providers could hurt STJ. Lastly, the result of the
2016 presidential election could affect the future forecast
for government regulations within the health care sector.
There are some candidates who desire to further advance
the ACA while other candidates may look to repeal the
ACA in order to pursue alternative health care reform.
The election result will signal to STJ where the health
care system and industry is likely headed.
Interest Rates
The health care sector relies heavily on capital for
renovations and operations. Companies usually have high
levels of debt in their financial statements because of
their capital dependence, and the debt includes loans with
both fixed and variable rates. Debt is often refinanced
when interest rate environments are low because the
lower cost of capital leads to more profitability.21 STJ has
managed to take advantage of low interest rates as the
company has successfully acquired Thoratec,
NeuroTherm Inc., and two other companies in the past
few years. STJ’s strong current ratio in the industry also
shows they are capable of paying off debt. The following
5
graph illustrates historical performance of the target and
effective federal funds rates.
the cost of employer health insurance. In particular,
employers will have fewer young and “cheap” employees
and more older and “expensive” employees. However, we
believe STJ will take advantage of the growing
population over 65 years old and find first-mover
advantages within the industry.
Source: Market Realist52
The effective federal funds rate is expected to reach 1%
by the end of 2016 and 4.5% by 2020.23 While we believe
the expectations of a 1% rate will hold true, the stagnant
and projected decrease in GDP growth along with global
uncertainty will move the rate below 1% by 2020. STJ
should continue to take advantage of these low rate
opportunities for future acquisitions and company
expansions.
Demographics
As the population ages, additional medical care is needed.
The baby boom generation is heading into retirement, and
Medicare enrollment is set to grow by an average of 1.6
million people per year.1 As a result, STJ can expect to
see an increase in sales from a good majority of their
product categories. Medical costs per person are highest
at approximately 80 years old excluding expenditures
associated with long-term and home health care. Males
aged 19-34 have the lowest per-person medical costs for
men, and females aged 0-18 years have the lowest perperson medical costs for women. Health care
expenditures associated with long-term care and home
care increases exponentially beyond 65 years of age. The
correlation between age and health care holds in that the
older the individual, the higher the expenditures
associated with health care treatment. The three dominant
factors that mediate this positive relationship are high
medical costs associated with death and the increasing
likelihood of death with age, increasing long-term and
home care with age among the very elderly, and the
severity of diabetes-related complications with age.11 The
following graph illustrates the rise in the percentage of 65
year olds and above working-age population since 2000.1
This rate is expected to quickly rise during the next 20
years, and we believe this demographic shift will strain
Source: PBS Newshour1
Capital Markets Outlook
Our analyst team believes the health care sector is a safe
investment with great opportunity due to the current state
of the economy, the steady and increasing demand for
medical attention, and government required enrollment
from the Affordable Care Act. The population aged 65
and older is expected to grow over the next several years
so STJ needs to be ready strategically to enhance their
product line to meet this demand and take advantage of
this opportunity. Approximately 19.1 million people are
also projected to register for Medicare during the next
eleven years, with 11.7 million Americans estimated to
have enrolled in 2015. Consequently, Medicare spending
is forecasted to grow at 7.4% from 2015 to 2022 in order
to match this enrollment.8 Lastly, we believe the
unemployment rate will remain steady at 5.0% over the
next few years, leading to more job creation in the health
care sector to meet increased demand. Although STJ is
struggling in a few areas of their business, we believe
they are still positioned to grow market share in the
medical equipment and supplies industry.
Industry Analysis
Industry Description
STJ competes within the medical equipment and supplies
industry, a component of the healthcare sector focused on
the diversified manufacturing and distribution of medical
products. The industry includes a variety of products that
6
are used to both diagnose and treat millions of patients.35
Medical products can be classified into 2 primary
categories. Conventional devices are easy to manufacture,
have narrow margins, and are price sensitive. Hightechnology products are better suited to demand a
premium as long as the competition has not yet caught up
to the technology.
Recent Developments and Industry Trends
The
industry
is
segmented
into
different
products/services, and the market share for each is
demonstrated in the figure below.
The manufacturing of conventional products yields
narrow margins. As a result, companies rely on high sales
volume in order to generate revenue. The sale of
conventional products is a steady stream of income for
most firms that provides funding for continued research
and development expenses. Reputable firms often have
long-term supply contracts with institutional healthcare
providers. Devices within this category of medical
equipment include surgical apparel, traditional wound
dressings, kits, trays, and a wide array of other products.
Barriers to entry are limited, allowing easy access to new
entrants and initiating intense competition.
Nearly all high-technology products yield high margins
until competitors catch up, which is inevitable given the
weakness of patents in the medical device industry. These
products face limited competition and usually command
price premiums if they have established clinical
effectiveness. High technology devices are subject to a
more substantial approval process from the FDA as well
as a longer patent process. Some examples of products
that fall into the high-technology category are
cardiovascular implants, orthopedic devices, wound care,
various surgical instruments, and some in vitro diagnostic
tests.
The following graph demonstrates the segments of the
medical equipment and supplies industry as well as their
percentage share of the available market.
Source: IBIS World 32
St. Jude is involved in the manufacturing of
cardiovascular, neuromodulation & spinal, and patient
recovery devices. The health care equipment and
supplies industry has largely underperformed the
healthcare sector in recent years. From 2011-2014, the
S&P 1500 Health Care Equipment and Supplies Index
was up 77.8% compared to 115.7% for the Health Care
Sector. The health care equipment and supplies industry
has recently had to adjust to new health care reform. The
Affordable Care Act has shifted the entire industry
toward value-based health care with increased regulatory
pressures and resource constraints.29 The reform could
continue to negatively impact the industry as health care
institutions are required to conduct operations within a
tighter budget and abide by stricter regulations.
Markets and Competition
Competitive Landscape and Major Players
Throughout the medical device industry, research and
development (R&D) spending is rising as companies try
to design innovative equipment in order to remain
competitive. The table on the following page illustrates
the R&D expenses of the top medical device companies
as a percentage of total sales from the fourth quarter of
2014 through the third quarter of 2015. In terms of sales,
the only firm that has invested more in R&D than St. Jude
Medical is Edward Life Sciences.
Source: IBIS World 32
7
STJ maintains a strong financial position amongst
competitors in the medical device industry as
demonstrated in the table. STJ’s return on assets (ROA)
and return on equity (ROE) ratios are higher than most of
their peers. These statistics demonstrate that STJ is
efficient and productive with their capital and equity.
STJ’s strong current ratio provides indication that they
have the ability to pay off their debt. A high current ratio
is often seen as an advantage when paying off debt
resulting from acquisitions or similar opportunities.36
Source: Yahoo Finance33
Medtronic, which has the highest market cap, spends the
most money on R&D expenses accounting for 18% of all
R&D spending within this industry. Medtronic maintains
a significant amount of cash both in terms of total cash
and cash/share. This gives the company more flexibility
in their operations and could be very useful if they were
looking to acquire another company. Cash also provides a
cushion in case of a market downturn, and their market
cap helps their leverage with health care service
providers. All of the companies included in the following
graphic have current ratios greater than one, signifying
that they are all capable of covering short-term liabilities
with short-term assets. Specifically, Medtronic and
Edwards Lifesciences are both in much better shape than
their competitors with ratios greater than three.33
Source: Yahoo Finance33
Porter’s Five Forces Analysis
Threat of Competition: High
Small companies often have nothing to lose when it
comes to the development of a cutting edge product that
replaces an existing technology. They are flexible with
their operations and maintain relationships with
researchers. At times, it is very easy for a small firm to
raise capital from a venture capitalist for the research and
development of a new product. However, they need
assistance in bringing their product to market once it has
been approved. Due to this and the risk and time
associated with developing medical technology, smaller
companies usually get bought out at some point in the
early stages of medical device launches. Larger
companies are usually the end suppliers for most medical
devices.
Threat of New Entrants: Low
The conventional device category is highly competitive
with low profit margins. Developing relationships and
obtaining long-term contracts with hospital chains and
other large-scale providers is the key to success in this
category. Alternatively, the high-technology category
requires a significant amount of research and
development (R&D) and is highly regulated, also making
entry difficult.31
Threat of Substitutes: Moderate
Conventional devices tend to be commodity-like by
nature, therefore making these products easily
replaceable. Companies compete for market share in this
space by increasing volumes, cutting costs, and obtaining
long-term contracts. Firms competing for conventional
product market share include Johnson & Johnson, GE
Healthcare, and Medtronic. High-technology devices are
better equipped to withstand the threat of substitutes due
to the use of patents to offer intellectual protection.
However, patents require a significant amount of
resources such as time and money for development which
limits the impact of patents in the medical device
industry.
Power of Suppliers: Low
8
Conventional devices are very competitive on pricing and
require large-scale operations. Highly technological
products can be sold at more of a premium until the
competition catches up.
Power of Buyers: Moderate
The conventional devices category is dominated by large
companies that have been able to cut costs, scale
manufacturing, and build long-term relationships with
large-scale medical service providers. These service
providers often belong to group purchasing organizations
(GPOs) that negotiate contracts. By combining providers
into groups, these organizations have more leverage in
their agreements. GPOs are able to obtain significant
price discounts for the providers in exchange for a
minimum number of products ordered. The role of GPOs
has strengthened in recent years due to cost cutting
initiatives by the service providers. Additionally, the
Affordable Care Act has concentrated the power of
insurance companies and Medicaid/Medicare, resulting in
more bargaining power. Highly technological products,
on the contrary, give more leverage to the suppliers.34
Physicians oftentimes have preferences for certain
products without much consideration of cost. Surgeons
are very particular when it comes to the products that they
select to use. Continuous improvements to old technology
and the introduction of new products are very important
for medical device companies to appeal to surgeons and
physicians.34
Catalysts for Growth and Change
R&D and M&A
Companies within the medical device industry rely on
research and development as well as mergers and
acquisitions to gain access to the latest technological
advancements. R&D funding is critical to remain
innovative. Companies with a higher percentage of sales
dedicated to research and development are better
equipped to remain relevant and develop advanced
medical products. Mergers and acquisitions are beneficial
for both companies involved. Large firms usually acquire
the new technology, which maintains or increases their
market share. Small firms benefit because large firms
devote substantial resources to acquire and build their
business. Additionally, large firms have more leverage,
maintain established relationships with service providers,
and are often better at the production and sale of
products. STJ acquired Thoratec, the leader in innovative
heart pumps, for $3.4 billion in 2015.1 The acquisition
helps STJ by growing their market share in the
cardiovascular subsector and expanding their product
expertise in heart pumps specifically.30
Growth in Chinese and Indian Markets
The United States and the European Union are massive
markets; however, the growth rates for these markets
have normally remained stable between 3-5%.
Developing countries provide opportunities for growth.
China’s large population and economic growth makes
them a primary target for US medical device exports.30
Key Investment Positives/Negatives
Key Investment Positives
• Aging Population
The increase in population of individuals aged 65
and older results in the expanding demand for
medical devices and equipment. Growing
demand allows companies more pricing power,
therefore leading to revenue growth, increase in
sales volume, and additional contracts.
• Government Regulation
Government funded programs such as Medicare
and Medicaid ensure that there will always be a
level of demand for medical equipment and
supplies. Additionally, enrollment requirements
stemming from the Affordable Care Act will give
more individuals access to healthcare, therefore
increasing product demand.46
• Interest Rates
The Federal Reserve has preserved the fed funds
rate between 0% and 0.25% since the end of
2008. The maintenance of this low interest rate
has made growth through R&D and M&A much
easier within the medical device industry. It also
affects manufacturers’ cost of capital projects,
stock repurchases, and dividends.
Key Investment Negatives
• Regulation
Strict regulation and tough competition make it
difficult for new competitors to enter the market.
If new competitors create a breakthrough
product, larger corporations are capable of
buying those competitors out. This option is
beneficial for both parties involved.
• Protective Patents
Patent specifications are stricter for the
biotechnology industry than for medical devices,
leading to greater odds of litigation.
Technological advancements also render
products out-of-date prior to patent expiry.
9
Company Analysis
Company Overview
St. Jude, Inc. (STJ) is a global medical device company
engaged in development, manufacturing, and distribution
of cardiovascular medical devices for the management of
chronic pain and movement disorders.37 The company
was founded in 1976 and is headquartered in St. Paul,
Minnesota, with its principal geographic locations found
in the United States, Europe, and Asia Pacific. Since
2013, STJ has acquired four companies including
Thoratec, NeuroTherm Inc, Endosense SA, and Spinal
Modulation Inc. STJ is also a leader in research and
development in their industry. These two factors
demonstrate STJ’s commitment to growth, especially
outside of the United States where 53% of their current
business is done.39 Beginning in 2011, STJ also began a
“business realignment plan” that included restructuring
business segments, centralizing SG&A activities, and
optimizing manufacturing and supply chain operations.
STJ has yet to realize any of the gains from the efficiency
improvements.43
Products and Markets
STJ has a portfolio of product offerings broken down into
three main divisions and seven business segments. The
three divisions are cardiac rhythm management,
cardiology, and neuromodulation.41 STJ has seven
business segments that include: ICD systems, atrial
fibrillation systems, vascular products, structural heart
products, neuromodulation products, and products
stemming from the acquisition of Thoratec.44 The CRM
business consists of around 46% of their total sales and is
critical to their success.37 CRM includes the Implantable
Cardioverter Defibrillation (ICD) and Pacemaker
business segments. In 2015, CRM sales decreased nearly
10%, so there is cause for concern on the future of STJ in
their largest product category.43 CRM is also highly
competitive with a substantial amount of R&D required
to remain relevant.41 STJ is committed to investing back
in the company with extremely consistent R&D
expenditures as percentages of sales. Over the past
several years, they have averaged around 12.5% of net
sales on R&D.44 Many of STJ’s recent R&D projects
have involved MRI-safe cardiac rhythm products.
Medtronic and Boston Scientific have already rolled out
MRI-safe resynchronization therapy pacemakers (CRT-P)
and have received approval for their MRI-safe
resynchronization therapy defibrillators (CRT-D), so STJ
is already behind the competition on these type of
products.40 STJ expects their CRT-Ps to be launched this
year, and their CRT-Ds are expected to be launched early
next year.37 After these products are launched, STJ should
see sales improve in their CRM division.
Neuromodulation involves the stimulation of the nervous
system using electrical signals. The market is extremely
difficult to enter in the United States because product
development takes a very long time and is incredibly
expensive. Regulatory approvals and patents are also a
difficult process when entering the neuromodulation
market. STJ has been developing neuromodulators for
relieving chronic spinal pain that do not need to be
recharged and their CEO expects these to be launched
soon.55 Our group believes STJ has a lot of room to grow
in the neuromodulation business segment. STJ is also
expected to release a leadless pacemaker later this year
that will help generate growth. The acquisition of
Thoratec allowed STJ to provide the most comprehensive
portfolio of products for advanced heart failure patients
that should lead to more physicians preferring their
products. The portfolio of products now includes
mechanical circulatory support devices, an area where
Thoratec led. This market is particularly popular in
Europe, where STJ estimates 125-130 million in revenue
alone.56
Source: Thomson One37
Competition
STJ’s two main competitors are Medtronic Inc. and
Boston Scientific Corporation. These two companies
compete with STJ in all three of their divisions.41 A chart
with the market share for each company in each of the
three divisions is displayed below.
Company
STJ
MDT
BSX
Market Share
CRM
Cardiology Neuromodulation
27.62%
7.08%
9.01%
19.39%
31.15%
41.62%
52.99%
23.10%
10.78%
Source: Yahoo Finance33
10
STJ has seen a decrease in sales in their largest business
segment over the past year. They have yet to receive FDA
approval of a low-voltage CRM device, and the market is
beginning to prefer these low-voltage alternatives. STJ
was late to receive approval in Japan compared to their
competitors in this space, and they were able to regain
market share back. STJ’s CardioMEMS device is one of
their best selling products in the CRM market, and they
have had trouble receiving reimbursement from private
insurers. The issue is the concept of fee-for-service
versus fee-for value. STJ’s CEO believes this is a result
of the transition of government regulation over the past
few years.55 Boston Scientific received approval for
their Emblem device, a device that physicians believe
will take market share from STJ and Medtronic in the
ICD market. The device that Boston Scientific has
introduced is smaller, has better battery life, and allows
for remote patient monitoring.54 The market has also
shown preferences for tissue heart valves instead of
mechanical valves, and STJ seems to be having a hard
time adjusting. They have been losing heart valve market
share due to this.44 Our group believes STJ will have to
introduce a tissue valve in 2017 to remain competitive.
STJ seems to be lagging with the development of new
products in certain categories.
Production and Distribution
Production
STJ owns about 75% of their manufacturing facilities,
and their facilities are located in nine different states as
well as Brazil, Puerto Rico, Cost Rica, Sweden, and
Malaysia.43 STJ has 75% of their property, plant, and
equipment (PP&E) located in the United States, and they
also have advanced technology centers in Texas,
Minnesota, California, China, Belgium, and Japan.44
Distribution, Suppliers, and Leases
STJ uses a direct sales force in the United States, Japan,
and throughout the rest of the world to market their
products, and the company uses independent distributors
in Japan and Asia. In the United States, STJ uses group
purchasing organizations (GPOs), independent delivery
networks (IDNs), and other accounts such as the Veterans
Administration for group purchasing decisions for
providers of health care. These relationships are normally
bound with long-term contracts, making it difficult for
entry into the market. STJ’s customers include CVS
Caremark Corporation, Express Scripts Inc., Walgreen
Co., Tenet Healthcare Corporation, and Davita Inc.41 STJ
has numerous suppliers of their raw materials, and these
relationships can be unstable and terminated in a short
period of time. STJ leases facilities and equipment
through operating lease agreements that includes 83 out
of 100 sales and administrative offices. They are currently
set to owe $122 million toward operating leases in the
future that are non-cancellable.44
Government Regulation
The Patient Protection and Affordable Care Act (PPACA)
will impact the operations and strategy of STJ moving
forward. It is still hard to determine whether the ACA will
have a positive or negative impact. The ACA has already
imposed a tax of 2.3% on most medical devices sold in
the United States in an effort to improve health care
quality and decrease costs. Any decrease in volume of
patients due to improved quality will adversely affect the
business. On the other side, many more people are
required to enroll in a health care program, which could
also benefit the operations of the business.44 Health care
institutions are required to conduct operations within a
tighter budget and abide by stricter regulations so it is
very difficult to tell yet whether the Affordable Care Act
will benefit or hurt St. Jude.
Business Process Improvements
In 2011, STJ began a restructuring plan that realigned the
CRM business. They disposed of some manufacturing
and R&D operations in Europe and finished the project in
2013. In 2012, STJ began a “business realignment plan.”
The company centralized information technology, human
resources, legal, and marketing. There were many
termination costs and write-offs associated with this plan
that ended up being costly. The vision of this realignment
was to accelerate growth, reduce costs, and utilize
economies of scale. STJ incurred over $100 million in
expenses due to severance and also had inventory/asset
write-off and restructuring costs. In 2014, St. Jude
implemented a “Manufacturing and Supply Chain
Optimization Plan” to reduce costs, centralize vendor
relationships, and create more efficient distribution
processes. The company realized over $60 million in
expenses due to contract terminations and information
technologies that are no longer used.43
Catalysts for Growth
STJ’s sales have been declining in their largest division,
but the company still has plenty of opportunity for
growth. Opportunities for St. Jude include the following:
• The launching of the MRI-safe CRT-D product
early next year would provide an opportunity for
STJ to gain market share back in their CRM
division. Due to the strong contractual
relationships STJ has in place, they should not
have trouble entering this market. Launching a
tissue heart valve would also allow St. Jude to
gain market share back.
11
•
•
•
The acquisition of Thoratec should provide a
spark to STJ’s product line. Thoratec develops,
manufactures, and markets proprietary medical
devices for heart failure patients. STJ has not
realized any of the benefits of this acquisition
yet. The company is better off strategically with
this acquisition and will be able to offer more
comprehensive products for heart failure
patients.56
Research and Development (R&D) is a critical
metric for all health care companies due to the
competitive environment and the importance of
patents. STJ has consistently dedicated 12% of
sales to R&D which is more than all four of their
main competitors historically.
STJ underwent a “business realignment plan”
over the past five years and have not realized the
gains on these improvements but have incurred a
significant amount of expenses.43
Key Investment Positives and Negatives
• STJ has invested an average of 12.42% of their
sales in R&D per year since 2005 which is much
higher than most of their competitors. The
combination of STJ’s R&D investment and low
payout ratio (32.37%) compared to competitors
signal they are focused on internal growth.
• STJ has not come up with a tissue heart valve
product yet and is losing market share in the
heart valve space. They are also losing market
share in their cardiac rhythm management
division because they have yet to offer a lowvoltage alternative, and they are having
difficulties adjusting to fee-for-value instead of
fee-for-service.
• STJ is dependent on volume with many of their
product lines, and the Affordable Care Act will
have an impact on volume. The company could
therefore be negatively impacted by the ACA.
However, increased enrollment could help offset
the decrease in volume. It seems the ACA has
been hurting more than helping STJ since its
implementation.
Valuation Analysis
Our group has decided to issue a “hold” recommendation
for STJ because we do not necessarily like the outlook of
the cardiac rhythm division for them, but we do believe
that they have yet to realize many of the benefits
stemming from their supply chain and operations
projects. STJ also invests heavily in research and
development compared to their competitors, a strategy in
the long run that should separate themselves in an
industry that is very competitive. We also believe that the
current climate we are in as a demographic with the aging
population of baby boomers will benefit STJ over the
next decade.
Revenue Growth
In order to project overall revenue growth for STJ, we
separated sales into their seven product categories. We
then computed historical growth rates for each category
and also computed each category as a percentage of
overall sales. Our inputs for revenue growth were growth
rates for each of the seven categories for all six years in
our model. These growth rates dictated the year’s sales
for that category. The growth rates were based on
revenue growth rate estimates from analysts, STJ’s
Form10k, and from our own projections for the individual
categories. We believe STJ will continue to struggle in
their CRM division, but not nearly the 10% loss they took
in 2015. STJ is expected to launch leadless pacemaker
systems this year that will generate demand and revenues
later this year.56 We expect the pacemaker division to
grow 7%. We expect their neuromodulation segment to
grow around 10% due to their new spinal product that
will not have to be recharged. Their products received
from the acquisition of Thoratec will also provide a spark
in revenue in 2016 because they are equipped to dominate
the advanced heart failure market. Our economic outlook
also had an impact on our estimates. We predict that the
economy will have a small downturn in 2018 due to
global economic uncertainty and slow GDP growth. We
forecasted revenue growth rates until 2021 when we
believe STJ will reach a steady state. STJ is already in
the maturity stage of the company life cycle. The
acquisition of Thoratec will have an impact on revenue
growth, and we believe that six years is enough time to
allow revenues from Thoratec’s product category to
stabilize.
Profit Margins
STJ’s gross margin has been consistently around 75%
historically. We estimated our COGS as a constant
percentage of sales based on historical percentages so our
gross margin is constant as well. We forecasted items
such as SG&A expense and other expenses as a
percentage of revenues based on historical percentages.
The historical percentages were fairly consistent so we
are confident in our expense projections. Their profit
margins are usually around 15%. Our profit margins are a
little more pessimistic partly because of our interest rate
expense projections as well as the negative growth in
STJ’s main product category and the competitive
12
environment in the medical device industry. Amortization
expense was calculated using a historical amortization
rate of amortization as a percentage of intangible assets.
Research and Development (R&D)
STJ does a great job at reinvesting back in the company
through research and development. We used a historical
average of their R&D expense as a percentage of sales
from 2005-2015 to get our projection for the next six
years. Due to STJ’s consistency in their R&D figures, we
are extremely confident in our R&D projections.
reflects the market’s future expectations and contains a lot
of forward-looking economic data. For beta, we used
Bloomberg to determine the average of the 1-year, 2-year,
3-year, 4-year, and 5-year weekly and monthly raw betas.
Our group found this beta to be accurate because the 5
raw betas used all seemed to stabilize around the average
of these betas and contained no outliers. Lastly, for the
Equity Risk Premium (ERP), our group used
Damodaran’s implied equity risk premium of 5.5%, as
this premium matched our forecast horizon well. Using
these estimates, our group arrived at a cost of equity of
9.29%.
Capital Expenditures
Property, plant, and equipment (PP&E) was forecasted
assuming constant PP&E purchases of $100, which was
much less than STJ’s purchase amount in 2015. STJ
normally purchases between $175 and $220 million
worth of PP&E each year, and the company’s purchases
have been decreasing over the past three years. Because
of St. Jude’s current cash constraints, we think they will
be required to cut back on PP&E purchases.
Cost of Debt
For the cost of debt, our group utilized the Yield-toMaturity (YTM) of STJ’s bond set to mature on April 15,
2043.We believe this figure was best to use because it
accurately matches our forecast horizon. Using this yield
along with a marginal tax rate of 12.30%, our group
arrived at a cost of debt of 3.75%.
Other Key Assumptions
Long-Term Debt
LTD was forecasted as a percentage of non-cash assets
based on the percentage in 2015. With the acquisition of
Thoratec, we felt 2015 was the most reflective of the
current state of long-term debt.
Valuation Models
Discounted Cash Flow and Economic Profit Model
Using the DCF and EP models, we obtained identical
prices of $66.35 per share for STJ. This price was driven
from our value driver estimates for NOPLAT, FCF, and
EP. Key inputs included the CV growth rate, CV return
on invested capital (ROIC), the WACC, and the cost of
equity. The price was then adjusted for year-to-date.
Common Stock Repurchases
We obtained common stock repurchasing information
from their 10K.
Interest Rate Expense
Our analyst team forecasted interest expense by
multiplying the cost of debt by the sum of current and
long-term debt.
Dividend Payments
STJ has been consistently increasing dividends by $0.08
per year. We assumed they will continue to increase
dividends by this amount.
Weighted Average Cost of Capital (WACC)
Our analyst team arrived at a WACC of 7.68% utilizing a
capital structure of 70.93% equity and 29.07% debt. The
cost of equity and cost of debt were calculated as follows:
Cost of Equity
Our group utilized the Capital Asset Pricing Model
(CAPM) approach to calculate the cost of equity. We
assumed a risk-free rate equal to the yield on the 30-year
US Treasury bond because we felt this number best
Dividend Discount Model (DDM)
The DDM model discounted future dividend payments
and the projected CV price based on STJ’s future P/E
ratio and EPS. This model gave us a price of $39.60. Our
group believes this price is reasonable because STJ has
very consistent dividend payment increases of $0.08 per
year.
Relative Valuation
In our relative valuation model, our group compared
relative P/E multiples of several competitors of STJ. We
also compared price/sales and price/book based on the
ratios of STJ’s competitors. We used the averages of
STJ’s main competitors to compute what STJ’s
theoretical price should be. For the relative P/E ratio, we
multiplied the average P/E of their competitors by STJ’s
EPS in both 2016 and 2017 to arrive at prices of $30.26
in 2016 and $36.16 in 2017. Similarly, for price/sales, we
multiplied the average of STJ’s competitors by STJ’s
revenue/share to calculate prices of $74.12 and $80.70 in
2016 and 2017, respectively. For price/book we
multiplied the average of STJ’s competitors by STJ’s
equity/share to get prices of $52.68 and $50.30 in 2016
13
and 2017, respectively. Our group believes that the P/E
ratio is the most relevant for health care companies.
Sensitivity Analysis
For our sensitivity analysis, we wanted to see how much
our most influential assumptions changed the price based
on minor changes in these assumptions. We compared the
equity risk premium against the beta, the WACC against
the CV growth rate, COGS against SG&A, and the cost
of debt against the PV of leases/PP&E ratio. Beta was one
of our toughest assumptions because of all the different
options for calculating beta. The price ranged from
$53.01 to $84.40 by incrementally changing beta from
1.412 to 1.012. Our group settled on a beta in the middle
of those two values by running several regressions of St.
Jude’s price against the S&P 500 price for one, two, three,
four, and five years as well as weekly and monthly for
each. The beta of 1.212 was in the middle of the
extremes of these calculations and seemed like the right
choice. The WACC was also a choice for a few of the
sensitivity tables. The WACC was used to discount cash
flows in both our DCF and EP models, so this figure can
sway the price quite a bit. Overall, our target price ended
up being between $58 and $66 with STJ currently trading
at $58.65.
14
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14,000 losing coverage each day. Center
for American Progress Action Fund.
Retrieved April 14, 2016 from
https://www.americanprogressaction.org/is
sues/healthcare/report/2009/02/19/5635/he
alth-care-in-crisis-14000-losing-coverageeach-day/
Perriello, B. (2015, March 20). CRM:
Boston Scientific's gain is St. Jude
Medical's loss – MassDevice. Retrieved
April 19, 2016, from
http://www.massdevice.com/crm-bostonscientifics-gain-st-jude-medicals-loss/
Saxena, V. (2016, January 15). JPM: St.
Jude Plagued by Gap in its Portfolio of
Pacemakers and Implantable defibrillators.
Retrieved April 19, 2016, from
http://www.fiercemedicaldevices.com/story
/jpm-st-jude-plagued-gap-its-portfoliopacemakers-and-implantabledefibrilla/2016-01-15
Collins, S. (2016, April 18). St. Jude's
Valuation Story: Growth Drivers and
Future Trends. Retrieved April 19, 2016,
from http://marketrealist.com/2016/04/stjudes-capital-allocation-strategy-affectsshareholders/
17
Important Disclaimer
This report was created by students enrolled in the
Applied Equity Valuation (6F:112) course at the
University of Iowa. The report was originally created to
offer an internal investment recommendation for the
University of Iowa Krause Fund and its advisory board.
The report also provides potential employers and other
interested parties an example of the students’ skills,
knowledge and abilities. Members of the Krause Fund
are not registered investment advisors, brokers or
officially licensed financial professionals. The investment
advice contained in this report does not represent an offer
or solicitation to buy or sell any of the securities
mentioned. Unless otherwise noted, facts and figures
included in this report are from publicly available
sources. This report is not a complete compilation of data,
and its accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the
Krause Fund may hold a financial interest in the
companies mentioned in this report.
18
St. Jude Medical, Inc.
Revenue Decomposition
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E (CV)
Sales
Cardiovascular Medical Devices
5,501
5,622
5,541
5,809
6,136
6,032
6,274
6,494
6,652
Growth
Cardiovascular Medical Devices
-0.04%
2.20%
-1.44%
4.83%
5.64%
-1.70%
4.02%
3.50%
2.43%
1,741
957
1,042
704
631
426
1,746
1,044
1,047
709
639
437
1,487
1,206
1,007
737
577
523
272
5,809
1,517
1,266
1,047
760
586
580
381
6,136
1,471
1,203
1,016
744
574
586
438
6,032
1,493
1,275
1,041
759
586
630
490
6,274
1,508
1,338
1,062
774
597
674
540
6,494
1,523
1,379
1,083
790
609
701
566
6,652
Net Sales
ICD Systems
Atrial Fibrillation Products
Pacemaker Systems
Vascular Products
Structural Heart Products
Neuromodulation Products
Thoratec Products
Net Sales
5,501
5,622
1,582
1,096
941
716
595
475
136
5,541
Percentage of Net Sales
ICD Systems
Atrial Fibrillation Products
Pacemaker Systems
Vascular Products
Structural Heart Products
Neuromodulation Products
Thoratec Products
Sum
31.6%
17.4%
18.9%
12.8%
11.5%
7.7%
-
31.7%
19.0%
19.0%
12.9%
11.6%
7.9%
-
28.8%
19.9%
17.1%
13.0%
10.8%
8.6%
2.5%
100.7%
25.6%
20.8%
17.3%
12.7%
9.9%
9.0%
4.7%
100.0%
24.7%
20.6%
17.1%
12.4%
9.5%
9.5%
6.2%
100.0%
24.4%
19.9%
16.8%
12.3%
9.5%
9.7%
7.3%
100.0%
23.8%
20.3%
16.6%
12.1%
9.3%
10.0%
7.8%
100.0%
23.2%
20.6%
16.4%
11.9%
9.2%
10.4%
8.3%
100.0%
22.9%
20.7%
16.3%
11.9%
9.2%
10.5%
8.5%
100.0%
Growth
ICD Systems
Atrial Fibrillation Products
Pacemaker Systems
Vascular Products
Structural Heart Products
Neuromodulation Products
Thoratec Products
-2.49%
6.57%
-1.68%
3.10%
0.71%
-
0.29%
9.09%
0.48%
0.71%
1.27%
2.58%
-
-9.39%
4.98%
-10.12%
0.99%
-6.89%
8.70%
-
-6.00%
10.00%
7.00%
3.00%
-3.00%
10.00%
100.00%
2.00%
5.00%
4.00%
3.00%
1.50%
11.00%
40.00%
-3.00%
-5.00%
-3.00%
-2.00%
-2.00%
1.00%
15.00%
1.50%
6.00%
2.50%
2.00%
2.00%
7.50%
12.00%
1.00%
5.00%
2.00%
2.00%
2.00%
7.00%
10.00%
1.00%
3.00%
2.00%
2.00%
2.00%
4.00%
5.00%
-
-
St. Jude Medical, Inc.
Income Statement
Fiscal Years Ending Dec. 31
Net sales
Cost of Sales:
Cost of sales before special charges:
COGS
Depreciation
Special charges
Total cost of sales
Gross profit
Selling, general and administrative expense
Research and development expense
Amortization of intangible assets
Purchased in-process research and development charges
Special charges
Operating profit (loss)
Interest income
Interest expense
Other (income) expense
Other expense, net
Earnings before income taxes and noncontrolling interest
Income tax expense
Net earnings before noncontrolling interest
Less: Net loss attributable to noncontrolling interest
Net earnings attributable to St. Jude Medical, Inc.
Net earnings per share attributable to St. Jude Medical, Inc:
Basic
Diluted
Cash dividends declared per share:
Weighted average shares outstanding:
Basic
$
2013
5,501 $
2014
5,622 $
2015
5,541 $
2016E
5,809 $
2017E
6,136 $
2018E
6,032 $
2019E
6,274 $
2020E 2021E (CV)
6,494 $
6,652
$
1,529
1,311
218
45
1,574
3,927
1,805
691
79
301
1,051
(5)
81
191
267
784
92
692
(31)
723 $
1,597
1,376
221
56
1,653
3,969
1,856
692
89
181
1,151
(5)
85
3
83
1,068
113
955
(47)
1,002 $
1,706
1,488
218
39
1,745
3,796
1,878
676
116
96
1030
(3)
103
2
102
928
62
866
(14)
880 $
1,832
1,560
272
54
1,886
3,923
2,028
721
247
8
129
790
274
11
285
505
62
443
443 $
1,884
1,648
237
57
1,941
4,195
2,143
762
219
9
136
926
266
12
278
648
80
568
568 $
1,828
1,620
208
56
1,884
4,148
2,106
749
195
9
134
955
264
12
275
680
84
596
596 $
1,871
1,685
186
58
1,929
4,345
2,191
779
173
9
139
1,054
253
12
265
788
97
691
691 $
1,912
1,744
168
60
1,972
4,521
2,268
806
154
9
144
1,140
248
13
260
879
108
771
771 $
1,941
1,786
154
62
2,002
4,650
2,323
826
137
10
147
1,207
246
13
258
948
117
831
831
3.52 $
3.46 $
1.08 $
3.11 $
3.07
1.16 $
1.62 $
1.24 $
2.14 $
1.32 $
2.31 $
1.40 $
2.76 $
1.48 $
3.15 $
1.56 $
3.48
1.64
285.0
282.2
273.3
265.2
257.7
250.9
244.6
238.9
$
$
$
2.52
2.49
1.00
287.0
$
$
$
St. Jude Medical, Inc.
Balance Sheet
Fiscal Years Ending Dec. 31
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts
Inventories
Deferred income taxes
Other current assets
Total current assets
Property, Plant and Equipment:
Land, building and improvements
Machinery and equipment
Diagnostic equipment
Property, plant and equipment, at cost
Less: accumulated depreciation
Net property, plant and equipment
Goodwill
Intangible assets, net
Deferred income taxes, net
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current debt obligations
Accounts payable
Dividends payable
Income taxes payable
Employee compensation and related benefits
Accrued expenses and other current liabilites
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total Liabilities
Commitments and Contingencies
Shareholders' Equity
Common stock and additional paid-in capital
Unearned compensation
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders' equity before noncontrolling interest
Noncontrolling interest
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
2013
1,373
1,422
708
229
178
3,910
$
2014
1,442
1,215
784
291
182
3,914
1,593
151
77
60
292
493
2,666
2,273
240
784
5,963
-
249
3,936
46
4,231
173
4,404
10,248
729
1,597
441
2,767
(1,447)
1,320
5,651
2,226
132
470
13,064 $
1,163
201
82
201
309
517
2,473
5,229
738
582
9,022
-
147
-
$
667
1,237
909
264
188
3,265
651
709
1,674
1,616
474
450
2,799
2,775
(1,389)
(1,432)
1,410
1,343
3,524
3,532
911
851
116
113
377
454
10,248 $ 10,207 $
62
247
72
32
312
655
1,380
3,518
240
706
5,844
2015
4,225
(173)
4,199
45
4,244
$ 10,207 $
2017E
2018E
2019E
2020E
459
1,456
759
224
217
3,116
408
1,538
802
237
229
3,214
215
1,512
788
233
225
2,974
126
1,573
820
242
234
2,996
144
1,628
849
251
243
3,114
744
1,662
461
2,867
(1,719)
1,148
5,651
1,979
129
430
12,453 $
1,163
258
89
30
317
563
2,420
5,059
314
681
8,474
2021E (CV)
204
1,667
870
257
249
3,246
770
796
822
848
1,720
1,778
1,836
1,894
493
509
525
477
2,967
3,067
3,167
3,267
(2,164)
(2,350)
(2,518)
(1,956)
1,011
903
817
749
5,651
5,651
5,651
5,651
1,760
1,565
1,392
1,238
136
134
139
144
455
447
465
481
12,228 $ 11,673 $ 11,460 $ 11,376 $
1,172
272
92
38
335
595
2,504
4,986
331
719
8,541
1,079
268
95
40
329
585
2,395
4,833
326
707
8,262
1,010
278
97
47
343
608
2,383
4,781
339
736
8,238
1,001
288
100
52
355
629
2,425
4,738
351
761
8,275
874
1,952
541
3,367
(2,673)
694
5,651
1,101
147
493
11,332
1,006
295
102
56
363
645
2,467
4,694
359
780
8,300
176
-
2016E
176
-
4,211
(345)
4,042
4,042
13,064 $
176
3,804
0
3,980
3,511
3,236
3,687
-
3,980
12,453
-
$
-
2,856
-
-
3,102
-
3,222
$ 11,460
176
-
2,926
3,222
-
3,412
$ 11,673
176
-
3,046
3,412
-
3,687
12,228
176
176
-
-
3,032
-
3,102
$ 11,376
$
3,032
11,332
St. Jude Medical, Inc.
Cash Flow Statement
Fiscal Years Ending Dec. 31
OPERATING ACTIVITIES
Net earnings before noncontrolling interest
Adjustments to reconcile net earnings before noncontrolling interest to net cash
from operating activities:
Depreciation of property, plant and equipment
Amortization of intangible assets
Amortization of debt discount (premium), net
Inventory step-up amortization
Contigent consideration fair value adjustments
Payment of contingent consideration
Stock-based compensation
Cash settlement of accelerated equity awards
Excess tax benefits from stock issued under employee stock plans
Investment impairment charges
Gain (loss) on sale of investments
Loss on retirement of long-term debt
Purchased in-process research and development charges
Special charges
Deferred income taxes
Other, net
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable
Inventories
Other current and noncurrent assets
Accounts payable and accrued expenses
Income taxes payable
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchases of property, plant and equipment
Business combination payments, net of cash acquired
Proceeds from sale of investments
Other investing activities, net
Net cash used in investing activities
FINANCING ACTIVITIES
Proceeds from exercise of stock options and stock issued, net
Excess tax benefits from stock issued under employee stock plans
Common stock repurchased, including related costs
Dividends paid
Issuances (payments) of commercial paper borrowings, net
Borrowings under debt facilities
Payments under debt facilities
Payments of debt issue costs and commitment fees
Purchase of call options
Proceeds from the sale of warrants
Purchase of shares from noncontrolling ownership interest
Payment of contingent consideration
Other financing activities, net
Net cash used in financing activities
Effect of currency exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
393
548
538
353
777
907
826
752
692
955
866
76
54
1
179
(12)
5
-
94
73
70
(29)
35
(11)
-
198
34
55
(98)
25
(8)
(19)
42
202
50
53
(49)
13
319
(50)
88
213
60
(26)
8
6
(14)
12
244
1
9
70
(17)
5
(5)
12
(34)
17
296
(5)
30
76
(9)
4
(65)
78
196
88
(11)
69
(1)
(14)
(77)
106
218
79
(6)
4
1
65
(15)
(13)
161
(124)
75
221
89
(5)
5
22
(27)
71
(21)
(3)
(87)
84
218
116
(2)
30
(87)
160
(74)
(24)
(22)
(37)
30
(139)
(24)
12
69
100
716
(55)
(77)
(18)
(29)
48
649
(92)
4
(5)
49
143
866
(92)
(74)
(20)
68
84
946
(39)
(104)
10
(65)
31
869
(123)
42
(30)
164
12
1,274
(55)
10
48
39
14
1,287
13
13
4
29
168
1,335
(100)
(99)
13
31
(21)
961
112
(102)
(70)
(60)
120
1,304
(39)
(39)
(4)
(25)
(28)
1,039
(159)
(1,776)
153
(30)
(1,811)
(268)
(39)
(19)
(326)
(287)
(12)
13
(20)
(306)
(344)
(490)
(37)
(871)
(326)
(130)
(35)
(491)
(305)
(679)
8
(105)
(1,081)
(307)
(30)
(337)
(222)
(292)
10
(18)
(522)
(190)
(147)
7
(9)
(339)
(186)
(3,252)
30
(37)
(3,445)
443
15
(833)
(282)
121
2,092
(1,659)
(17)
(137)
(257)
(3)
179
1,194
1,373 $
135
21
(476)
(303)
75
250
(50)
(344)
(128)
(7)
(827)
(69)
69
1,373
1,442 $
139
24
(500)
(322)
(285)
3,772
(925)
(33)
(173)
(5)
1,692
(61)
(775)
1,442
667
126
77
29
(700)
3,378
4,949
(3,196)
(4,487)
660
(655)
968
(786)
(27)
8
(153)
(455)
688
535
$ 535 $
80 $
187
98
(1,000)
8,046
(8,724)
1,200
(101)
35
(259)
9
310
80
390 $
166
126
49
26
(300)
(1,000)
(19)
968
11,110
(10,374)
(1,205)
(322)
(131)
(5)
9
(253)
256
389
136
136 $
393 $
152
17
(591)
26
940
(620)
(10)
(86)
107
393
500 $
302
9
(809)
(205)
247
78
(78)
(456)
(8)
486
500
986 $
(280)
19
(52)
(313)
119
1
(992)
(284)
321
22
(813)
(1)
208
986
1,194 $
St. Jude Medical, Inc.
Projected Cash Flow Statement
Fiscal Years Ending Dec. 31
Net Income
Plus Adjustments for Non-Cash Operating Expenses:
Depreciation
Amortization of Intangible Assets
Deferred income taxes
Plus Changes in Working Capital:
Accounts receivable
Inventories
Other current assets
Other assets
Accounts payable
Dividends payable
Employee compensation
Income taxes payable
Accrued expenses and other liabilities
Other Liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchases of property, plant and equipment
Net cash provided by investing activities
FINANCING ACTIVITIES
Common stock repurchased, including related costs
Common stock issued
Changes in Long-Term Debt
Accumulated other comprehensive income
Dividend payments
Current debt obligations
Net cash provided by financing activities
Net change in cash
Cash beginning of period
Cash ending of period
2016E
$
$
2017E
2018E
2019E
2020E
2021E (CV)
568 $
596 $
691 $
771 $
831
272
247
(381)
237
219
(2)
208
195
1
186
173
(2)
168
154
(1)
154
137
(1)
(219)
150
(29)
40
57
7
8
(171)
46
99
567
(82)
(43)
(12)
(24)
15
3
18
8
32
38
974
26
14
4
8
(5)
3
(6)
2
(10)
(12)
1,024
(61)
(32)
(9)
(18)
11
3
13
6
23
28
1,015
(55)
(29)
(8)
(16)
10
3
12
5
21
26
1,061
(40)
(21)
(6)
(12)
7
2
9
4
15
19
1,100
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(500)
0
(170)
345
(350)
0
(675)
(208)
667
459 $
(500)
0
(74)
0
(361)
9
(925)
(51)
459
408 $
(500)
0
(152)
0
(371)
(93)
(1,117)
(193)
408
215 $
(500)
0
(53)
0
(381)
(69)
(1,003)
(89)
215
126 $
(500)
0
(43)
0
(391)
(9)
(943)
18
126
144 $
(500)
0
(44)
0
(401)
5
(940)
60
144
204
443 $
St. Jude Medical, Inc.
Common Size Income Statement
Fiscal Years Ending Dec. 31
Net sales
Cost of Sales:
Cost of sales before special charges
COGS
Depreciation
Special charges
Total cost of sales
Gross profit
Selling, general and administrative expense
Research and development expense
Amortization of intangible assets
Purchased in-process research and development charges
Special charges
Operating profit (loss)
Interest income
Interest expense
Other (income) expense
Other expense, net
Earnings before income taxes and noncontrolling interest
Income tax expense
Net earnings before noncontrolling interest
Less: Net loss attributable to noncontrolling interest
Net earnings attributable to St. Jude Medical, Inc.
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E (CV)
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
27.79%
23.83%
3.96%
0.82%
28.61%
71.39%
32.81%
12.56%
1.44%
5.47%
19.11%
-0.09%
1.47%
3.47%
4.85%
14.25%
1.67%
12.58%
-0.56%
13.14%
28.41%
24.48%
3.93%
1.00%
29.40%
70.60%
33.01%
12.31%
1.58%
3.22%
20.47%
-0.09%
1.51%
0.05%
1.48%
19.00%
2.01%
16.99%
-0.84%
17.82%
30.79%
26.85%
3.93%
0.70%
31.49%
68.51%
33.89%
12.20%
2.09%
1.73%
18.59%
-0.05%
1.86%
0.04%
1.84%
16.75%
1.12%
15.63%
-0.25%
15.88%
31.54%
26.85%
4.68%
0.93%
32.46%
67.54%
34.92%
12.42%
4.24%
0.14%
2.22%
13.59%
4.71%
0.19%
4.90%
8.69%
1.07%
7.62%
7.62%
30.71%
26.85%
3.86%
0.93%
31.64%
68.36%
34.92%
12.42%
3.57%
0.14%
2.22%
15.09%
4.34%
0.19%
4.53%
10.56%
1.30%
9.26%
9.26%
30.31%
26.85%
3.46%
0.93%
31.24%
68.76%
34.92%
12.42%
3.23%
0.14%
2.22%
15.83%
4.37%
0.19%
4.56%
11.27%
1.39%
9.88%
9.88%
29.82%
26.85%
2.97%
0.93%
30.75%
69.25%
34.92%
12.42%
2.76%
0.14%
2.22%
16.79%
4.03%
0.19%
4.23%
12.56%
1.55%
11.02%
11.02%
29.45%
26.85%
2.59%
0.93%
30.37%
69.63%
34.92%
12.42%
2.37%
0.14%
2.22%
17.55%
3.82%
0.19%
4.01%
13.54%
1.67%
11.88%
11.88%
29.17%
26.85%
2.32%
0.93%
30.10%
69.90%
34.92%
12.42%
2.06%
0.14%
2.22%
18.14%
3.69%
0.19%
3.89%
14.25%
1.75%
12.50%
12.50%
St. Jude Medical, Inc.
Common Size Balance Sheet
Fiscal Years Ending Dec. 31
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts
Inventories
Deferred income taxes
Other current assets
Total current assets
Property, Plant and Equipment:
Land, building and improvements
Machinery and equipment
Diagnostic equipment
Property, plant and equipment, at cost
Less: accumulated depreciation
Net property, plant and equipment
Goodwill
Intangible assets, net
Deferred income taxes, net
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current debt obligations
Accounts payable
Dividends payable
Income taxes payable
Employee compensation and related benefits
Accrued expenses and other current liabilites
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total Liabilities
Commitments and Contingenciees
Shareholders' Equity
Common stock and additional paid-in capital
Unearned compensation
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders' equity before noncontrolling interest
Noncontrolling interest
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E (CV)
24.96%
25.85%
12.87%
4.16%
3.24%
71.08%
25.65%
21.61%
13.95%
5.18%
3.24%
69.62%
12.04%
22.32%
16.40%
4.76%
3.39%
58.92%
7.90%
25.07%
13.07%
3.86%
3.74%
53.64%
6.64%
25.07%
13.07%
3.86%
3.74%
52.38%
3.56%
25.07%
13.07%
3.86%
3.74%
49.30%
2.01%
25.07%
13.07%
3.86%
3.74%
47.75%
2.21%
25.07%
13.07%
3.86%
3.74%
47.95%
3.06%
25.07%
13.07%
3.86%
3.74%
48.80%
11.83%
30.43%
8.62%
50.88%
-25.25%
25.63%
64.06%
16.56%
2.11%
6.85%
186.29%
12.61%
28.74%
8.00%
49.36%
-25.47%
23.89%
62.82%
15.14%
2.01%
8.08%
181.55%
13.16%
28.82%
7.96%
49.94%
-26.11%
23.82%
101.99%
40.17%
2.38%
8.48%
235.77%
13.16%
28.61%
7.94%
49.36%
-29.59%
19.76%
97.29%
34.08%
2.22%
7.41%
214.39%
13.16%
28.03%
7.77%
48.35%
-31.87%
16.48%
92.10%
28.69%
2.22%
7.41%
199.28%
13.16%
29.48%
8.17%
50.85%
-35.88%
14.97%
93.69%
25.95%
2.22%
7.41%
193.53%
13.16%
29.26%
8.11%
50.48%
-37.46%
13.02%
90.07%
22.18%
2.22%
7.41%
182.64%
13.16%
29.17%
8.09%
50.31%
-38.78%
11.53%
87.02%
19.06%
2.22%
7.41%
175.19%
13.16%
29.35%
8.14%
50.62%
-40.18%
10.44%
84.96%
16.55%
2.22%
7.41%
170.37%
1.13%
4.49%
1.31%
0.58%
5.67%
11.91%
25.09%
63.95%
4.36%
12.83%
106.24%
-
28.34%
2.69%
1.37%
1.07%
5.19%
8.77%
47.42%
40.43%
4.27%
13.95%
106.07%
-
20.99%
3.63%
1.48%
3.63%
5.58%
9.33%
44.63%
94.37%
13.32%
10.50%
162.82%
-
20.02%
4.44%
1.53%
0.51%
5.46%
9.69%
41.66%
87.10%
5.40%
11.72%
145.88%
19.10%
4.44%
1.50%
0.62%
5.46%
9.69%
40.81%
81.25%
5.40%
11.72%
139.19%
17.89%
4.44%
1.57%
0.67%
5.46%
9.69%
39.71%
80.13%
5.40%
11.72%
136.97%
16.10%
4.44%
1.55%
0.74%
5.46%
9.69%
37.98%
76.19%
5.40%
11.72%
131.29%
15.41%
4.44%
1.54%
0.80%
5.46%
9.69%
37.34%
72.96%
5.40%
11.72%
127.42%
15.12%
4.44%
1.54%
0.84%
5.46%
9.69%
37.09%
70.57%
5.40%
11.72%
124.79%
4.53%
71.55%
0.84%
76.91%
3.14%
80.06%
186.29%
2.61%
75.15%
-3.08%
74.69%
0.80%
75.49%
181.55%
3.18%
76.00%
-6.23%
72.95%
72.95%
235.77%
3.03%
2.87%
2.92%
2.81%
2.71%
2.65%
65.48%
68.51%
68.51%
214.39%
57.22%
60.09%
60.09%
199.28%
53.65%
56.57%
56.57%
193.53%
48.54%
51.35%
51.35%
182.64%
45.05%
47.76%
47.76%
175.19%
42.94%
45.58%
45.58%
170.37%
St. Jude Medical, Inc.
Value Driver Estimation
Fiscal Years Ending Dec. 31
NOPLAT Computation
Net Sales
- Cost of Goods Sold
- Depreciation
- Research & Development Exp
- SG&A
- Amortization of intangible assets
- Purchased in-process R&D charges
+ Implied Interest on Operating Leases
EBITA
Less: Adjusted Taxes
Income Tax Expense (benefit)
+ Tax Shield on Implied Lease Interest
- Other Income
Adjusted Taxes
Plus: Change in Deferred Tax Liabilities
Current Year DT Liabilities
- Current Year DT Current Assets
- Current Year DT Long-Term Assets
= Net DT Liabilies for Current Year
Previous Year DT Liabilities
- Previous Year DT Current Assets
- Previous Year DT Long-Term Assets
= Net DT Liabilites for Previous Year
Net Change in DT Liabilities (Current-Previous)
NOPLAT
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E (CV)
5,503
1,249
196
676
1,803
88
5
1,496
5,501
1,311
218
691
1,805
79
5
1,402
5,622
1,376
221
692
1,856
89
4
1,392
5,541
1,488
218
676
1,878
116
5
1,170
5,809
1,560
272
721
2,028
7
1,234
6,136
1,648
237
762
2,143
3
1,350
6,032
1,620
208
749
2,106
3
1,351
6,274
1,685
186
779
2,191
3
1,436
6,494
1,744
168
806
2,268
3
1,511
6,652
1,786
154
826
2,323
3
1,565
253
1
12
242
92
1
33
60
113
0
10
103
62
1
13
50
62
1
35
28
80
0
34
46
84
0
34
50
97
0
33
65
108
0
32
77
117
0
32
85
323
220
130
(27)
392
225
167
(194)
1,060
Invested Capital Computation
Operating Current Assets
Normal Cash
133
Accounts Receivable
1,349
Inventory
610
Other Current Assets
178
Operating Current Assets
2,270
Operating Current Liabilities
Accounts payable
254
Dividends payable
68
Income taxes payable
142
Employee compensation and related benefits
299
Accrued expenses and other current liabilites
482
Operating Current Liabilities
1,245
Net Operating Working Capital
1,025
+ Net PPE
1,425
+ PV of Operating Leases
112
+ Other Assets
400
+ Intangible Assets, Net
804
- Other liabilities
529
Invested Capital
3,237
Value Drivers
ROIC =
Beginning IC ÷
NOPLAT
EP = Beginning IC * (ROIC-WACC)
Beginning IC
ROIC
WACC
FCF =
NOPLAT
+ Beg IC
- Current IC
28.2%
3,761
1,060
772
3,761
28.2%
8%
1,585
1,060
3,761
3,237
240
229
116
(105)
323
220
130
(27)
(78)
1,264
240
291
113
(164)
240
229
116
(105)
(59)
1,229
738
264
132
342
240
291
113
(164)
506
1,626
133
1,422
708
178
2,441
136
1,215
784
182
2,317
134
1,237
909
188
2,468
247
72
32
312
655
1,318
1,123
1,410
86
377
911
706
3,201
151
77
60
292
493
1,073
1,244
1,343
109
454
851
784
3,217
39.1%
3,237
1,264
1,016
3,237
39.1%
8%
1,300
1,264
3,237
3,201
38.4%
3,201
1,229
984
3,201
38.4%
8%
1,213
1,229
3,201
3,217
314
224
129
(39)
738
264
132
342
(381)
825
331
237
136
(42)
314
224
129
(39)
(2)
1,302
326
233
134
(41)
331
237
136
(42)
1
1,302
339
242
139
(43)
326
233
134
(41)
(2)
1,370
351
251
144
(44)
339
242
139
(43)
(1)
1,433
359
257
147
(45)
351
251
144
(44)
(1)
1,479
141
1,456
759
217
2,573
148
1,538
802
229
2,718
146
1,512
788
225
2,672
152
1,573
820
234
2,779
157
1,628
849
243
2,876
161
1,667
870
249
2,946
201
82
201
309
517
1,310
1,158
1,320
167
470
2,226
582
4,759
258
89
30
317
563
1,257
1,316
1,148
74
430
1,979
681
4,267
272
92
38
335
595
1,332
1,386
1,011
74
455
1,760
719
3,966
268
95
40
329
585
1,316
1,355
903
74
447
1,565
707
3,637
278
97
47
343
608
1,373
1,406
817
74
465
1,392
736
3,418
288
100
52
355
629
1,424
1,453
749
74
481
1,238
761
3,233
295
102
56
363
645
1,461
1,485
694
74
493
1,101
780
3,067
50.5%
3,217
1,626
1,379
3,217
50.5%
8%
84
1,626
3,217
4,759
17.3%
4,759
825
459
4,759
17.3%
8%
1,317
825
4,759
4,267
30.5%
4,267
1,302
974
4,267
30.5%
8%
1,602
1,302
4,267
3,966
32.8%
3,966
1,302
997
3,966
32.8%
8%
1,631
1,302
3,966
3,637
37.7%
3,637
1,370
1,091
3,637
37.7%
8%
1,589
1,370
3,637
3,418
41.9%
3,418
1,433
1,170
3,418
41.9%
8%
1,618
1,433
3,418
3,233
45.8%
3,233
1,479
1,231
3,233
45.8%
8%
1,645
1,479
3,233
3,067
St. Jude Medical, Inc.
Weighted Average Cost of Capital (WACC) Estimation
Equity (Re)
Beta
Risk-Free Rate (R f )
Equity Risk Premium (ERP)
Cost of Equity (R e )
Current Share Price
Current Shares Outstanding
Market Capitalization
1.212
2.62%
5.50%
9.29%
$56.42
283.67
$16,005
Debt (Rd)
Pre-Tax Cost of Debt
Marginal Tax Rate
After-Tax Cost of Debt (R d )
Market Value of Debt (Current Debt Obligations + LTD)
Capitalized Operating Leases
Enterprise Value
Equity Weight
Debt Weight
WACC =
4.28%
12.30%
3.75%
6,392
167
$22,564
70.93%
29.07%
7.68%
St. Jude Medical, Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity (Re)
2.43%
45.8%
7.68%
9.29%
Fiscal Years Ending Dec. 31
2016E
2017E
2018E
2019E
2020E
2021E (CV)
DCF Model
NOPLAT
ROIC
Change in Invested Capital (Δ IC)
Free Cash Flow (FCF) to Discount
Continuing Value (t=5)
825
17.3%
(492)
1,317
1,302
30.5%
(300)
1,602
1,302
32.8%
(329)
1,631
1,370
37.7%
(219)
1,589
1,433
41.9%
(186)
1,618
1,479
45.8%
(166)
PV of FCF Discounted by WACC
1,223
Value of Operating Assets
+ Excess Cash
- Current Debt Obligations
- Long Term Debt
- PV Operating Leases
- Unearned Compensation
- Minority Interest
- ESOP
Value of Equity
÷ Shares Outstanding
Intrinsic Value (Per Share)
Fraction of Year Elapsed
Stock Price as of Today (4/19/2016)
EP Model
Beginning Invested Capital
Economic Profit (EP)
Continuing Value (t=5)
EP to Discount
PV of EP Discounted by WACC
PV of Economic Profit
+ Beginning Invested Capital
Value of Operating Assets
+ Excess Cash
- Current Debt Obligations
- Long Term Debt
- PV Operating Leases
- Unearned Compensation
- Minority Interest
- ESOP
Value of Equity
÷ Shares Outstanding
Intrinsic Value (Per Share)
Fraction of Year Elapsed
Stock Price as of Today (4/19/2016)
26,693
1,382
1,306
1,182
1,118
18,440
4,759
459
974
997
1,091
1,170
1,231
23,460
459
427
974
840
997
799
1,091
811
1,170
808
23,460
16,207
24,652
533
1,163
5,229
167
239
18,387
283.67
64.82
0.3005
$66.35
19,893
4,759
24,652
533
1,163
5,229
167
239
18,387
283.67
64.82
0.3005
$66.35
St. Jude Medical, Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31
EPS
Periods to Discount
Key Assumptions
CV Growth
CV ROE
Cost of Equity (Re)
2016E
$
1.62 $
1
2017E
2.14 $
2
2018E
2.31 $
3
2019E
2.76 $
4
2020E
2021E (CV)
3.15 $
5
3.48
5
2.43%
27.42%
9.29%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Future Cash Flows
$
$
1.62 $
1.62 $
2.14 $
2.14 $
2.31 $
2.31 $
2.76 $
2.76 $
3.15
3.15 $
46.28
Discounted Cash Flows
$
1.48 $
1.79 $
1.77 $
1.93 $
2.02 $
29.68
Intrinsic Value (Per Share)
Fraction of Year Elapsed
Stock Price as of Today (4/19/2016)
$
$
$
$
38.69
0.3005
39.60
13.29
3.48
46.28
St. Jude Medical, Inc.
Relative Valuation Models
Ticker
BSX
MDT
SYK
ABT
BDX
Company
Boston Scientific Corporation
Medtronic Plc
Stryker Corporation
Abbott Laboratories
Becton, Dickinson & Co.
STJ
St. Jude Medical, Inc.
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
Price
$19.23
$76.40
$109.48
$42.54
$154.86
EPS
2016E
$1.05
$4.37
$5.60
$2.16
$8.42
EPS
2017E
$1.19
$4.71
$6.13
$2.41
$9.38
Average
$56.42
$1.62
$2.14
$
$
30.26
36.16
Rev/Share (2016E)
Rev/Share (2017E)
Relative P/S Price (2016E)
Relative P/S Price (2017E)
$
$
$
$
21.25
23.14
74.12
80.70
Equity Share (2016E)
Equity Share (2017E)
Relative P/B Price (2016E)
Relative P/B Price (2017E)
$
$
$
$
14.56
13.90
52.68
50.30
P/E 16 P/E 17 Price/Sales Price/Book
18.3 16.2
3.43
4.01
17.5 16.2
4.11
2.03
4.01
4.69
19.6 17.9
19.7 17.7
3.01
2.89
18.4 16.5
2.88
4.47
3.49
3.62
18.7 16.9
34.8
26.3
2.82
3.86
St. Jude Medical
Key Management Ratios
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Liquidity Ratios
Current Ratio (CA/CL)
Quick Ratio (CA - Inventories)/CL
Cash Ratio (Cash and Cash Equivalents/CL)
2.83
2.32
0.99
1.47
1.17
0.54
1.32
0.95
0.27
1.29
0.97
0.19
1.28
0.96
0.16
1.24
0.91
0.09
1.26
0.91
0.05
1.28
0.93
0.06
Activity or Asset-Management Ratios
Asset Turnover Ratio (Sales/Total Assets)
Inventory Turnover Ratio (Sales/Total Inventory)
Receivables Turnover Ratio (Sales/Average AR)
Financial Leverage Ratios
Debt-to-Equity Ratio (Total Debt/Total Equity)
Equity Ratio (Shareholders' Equity/Total Assets)
Interest Coverage (Operating Income/Interest Expense)
Profitability Ratios
Return on Assets (NI/Total Assets)
Return on Equity (NI/SE)
Gross Margin (Revenue-COGS)/Revenue
EBIT Margin (EBIT/Sales)
Profit Margin (NI/Sales)
Payout Policy Ratios
Payout Ratio (Dividends per share/Earnings per share)
Total Payout Ratio (Dividends + Repurchases)/NI
46.64%
7.65
4.24
55.08%
7.17
4.26
42.41%
6.10
4.52
0.85
0.43
12.98
0.92
0.42
13.54
1.58
0.31
10.00
7.06%
16.42%
76.17%
19.11%
13.14%
9.82%
23.61%
75.52%
20.47%
17.82%
6.74%
21.77%
73.15%
18.59%
15.88%
3.55%
11.12%
73.15%
13.59%
7.62%
4.65%
15.41%
73.15%
15.09%
9.26%
5.11%
17.47%
73.15%
15.83%
9.88%
6.03%
21.46%
73.15%
16.79%
11.02%
6.78%
24.87%
73.15%
17.55%
11.88%
7.34%
27.42%
73.15%
18.14%
12.50%
39.68%
154.22%
30.68%
77.74%
37.30%
93.41%
76.57%
192.01%
61.62%
151.51%
60.53%
146.15%
53.71%
127.50%
49.48%
115.57%
47.11%
108.38%
1.67
0.30
3.48
51.67%
7.65
4.03
1.73
0.29
3.62
54.75%
7.65
4.03
1.80
0.28
4.16
57.08%
7.65
4.03
1.32
0.96
0.08
53.68%
7.77
3.97
1.56
0.32
2.89
50.18%
7.65
4.01
2021E (CV)
1.85
0.27
4.60
58.70%
7.65
4.03
1.88
0.27
4.91
St. Jude Medical, Inc.
Sensitivity Analysis
PV/PP&E Ratio
Beta
$
66.35
1.012
1.062
1.112
1.162
1.212
1.262
1.312
1.362
1.412
5.30%
5.35%
5.40%
5.45%
5.50%
5.55%
5.60%
5.65%
5.70%
84.40
83.55
82.73
81.91
81.11
80.32
79.54
78.78
78.02
80.13
79.32
78.52
77.73
76.96
76.20
75.45
74.71
73.99
76.21
75.42
74.65
73.89
73.14
72.41
71.69
70.97
70.27
72.58
71.82
71.08
70.34
69.62
68.91
68.21
67.52
66.84
69.22
68.49
67.76
67.05
66.35
65.67
64.99
64.33
63.67
66.10
65.39
64.69
64.00
63.32
62.66
62.00
61.36
60.72
63.19
62.50
61.82
61.15
60.50
59.85
59.21
58.59
57.97
60.47
59.80
59.14
58.49
57.86
57.23
56.61
56.01
55.41
57.93
57.27
56.63
56.01
55.39
54.78
54.18
53.59
53.01
$
66.35
2.0306%
2.1306%
2.2306%
2.3306%
2.4306%
2.5306%
2.6306%
2.7306%
2.8306%
7.2778%
68.48
69.65
70.86
72.13
73.45
74.82
76.25
77.75
79.31
7.3778%
66.82
67.94
69.10
70.31
71.57
72.87
74.24
75.66
77.14
7.4778%
65.23
66.30
67.41
68.56
69.76
71.01
72.31
73.66
75.07
7.5778%
63.69
64.72
65.78
66.88
68.02
69.21
70.45
71.74
73.08
7.6778%
62.21
63.19
64.21
65.26
66.35
67.49
68.67
69.90
71.18
7.7778%
60.78
61.72
62.69
63.70
64.75
65.83
66.96
68.13
69.35
7.8778% 7.9778%
59.40
58.06
60.30
58.93
61.23
59.82
62.20
60.75
63.20
61.70
64.24
62.70
65.31
63.73
66.43
64.80
67.60
65.91
8.0778%
56.77
57.60
58.46
59.34
60.26
61.21
62.20
63.22
64.29
$
66.35
30.9207%
31.9207%
32.9207%
33.9207%
34.9207%
35.9207%
36.9207%
37.9207%
38.9207%
22.8544%
94.91
91.34
87.77
84.20
80.63
77.06
73.49
69.92
66.35
23.8544%
91.34
87.77
84.20
80.63
77.06
73.49
69.92
66.35
62.79
24.8544%
87.77
84.20
80.63
77.06
73.49
69.92
66.35
62.79
59.22
25.8544%
84.20
80.63
77.06
73.49
69.92
66.35
62.79
59.22
55.65
COGS
26.8544%
80.63
77.06
73.49
69.92
66.35
62.79
59.22
55.65
52.08
27.8544%
77.06
73.49
69.92
66.35
62.79
59.22
55.65
52.08
48.51
ERP
WACC
CV Revenue Growth
SG&A
28.8544% 29.8544% 30.8544%
73.49
69.92
66.35
69.92
66.35
62.79
66.35
62.79
59.22
62.79
59.22
55.65
59.22
55.65
52.08
55.65
52.08
48.51
52.08
48.51
44.94
48.51
44.94
41.37
44.94
41.37
37.80
$ 66.35
Pre-Tax Cost of Debt
3.28%
3.53%
3.78%
4.03%
4.28%
4.53%
4.78%
5.03%
5.28%
65.65%
67.65%
69.65%
71.65%
73.65%
75.65%
77.65%
79.65%
81.65%
70.76
69.62
68.51
67.43
66.37
65.34
64.33
63.35
62.39
70.76
69.62
68.51
67.43
66.37
65.34
64.33
63.35
62.38
70.75
69.61
68.50
67.42
66.36
65.33
64.33
63.34
62.38
70.75
69.61
68.50
67.42
66.36
65.33
64.32
63.34
62.38
70.74
69.61
68.49
67.41
66.35
65.32
64.32
63.33
62.37
70.74
69.60
68.49
67.41
66.35
65.32
64.31
63.33
62.37
70.73
69.60
68.49
67.40
66.35
65.31
64.31
63.32
62.36
70.73
69.59
68.48
67.40
66.34
65.31
64.30
63.32
62.36
70.73
69.59
68.48
67.39
66.34
65.30
64.30
63.31
62.35
Present Value of Operating Lease Obligations (2015)
Present Value of Operating Lease Obligations (2014)
Operating
Leases
53
36
26
22
21
32
190
23
167
Fiscal Years Ending Dec. 31
2016
2017
2018
2019
2020
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
53
36
26
22
21
21
Present Value of Operating Lease Obligations (2013)
Operating
Leases
35
28
23
18
11
7
122
13
109
Fiscal Years Ending Dec. 31
2015
2016
2017
2018
2019
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
4.28%
1.5
PV Lease
Payment
50.8
33.1
22.9
18.6
17.0
24.6
167.1
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
35
28
23
18
11
7
Present Value of Operating Lease Obligations (2012)
Operating
Leases
30
22
15
15
10
4
96
10
86
Fiscal Years Ending Dec. 31
2014
2015
2016
2017
2018
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
4.28%
1.0
PV Lease
Payment
33.6
25.7
20.3
15.2
8.9
5.4
109.2
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
30
22
15
15
10
4
Operating
Leases
37
28
21
16
14
9
125
13
112
Fiscal Years Ending Dec. 31
2013
2014
2015
2016
2017
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
4.28%
1.0
PV Lease
Payment
28.8
20.2
13.2
12.7
8.1
3.1
86.1
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
37
28
21
16
14
9
4.28%
1.0
PV Lease
Payment
35.5
25.7
18.5
13.5
11.4
7.0
111.6
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares):
Average Time to Maturity (years):
Expected Annual Number of Options Exercised:
Current Average Strike Price:
Cost of Equity:
Current Stock Price:
10
3.60
3
$
$
40.76
9.00%
56.42
2016E
3
40.76 $
117
2017E
3
40.76 $
117
2018E
2019E
2020E
3
40.76 $
117
3
40.76 $
117
3
40.76 $
117
2021E (CV)
Increase in Shares Outstanding:
Average Strike Price:
Increase in Common Stock Account:
$
Change in Treasury Stock
Expected Price of Repurchased Shares:
Number of Shares Repurchased:
500,000,000 500,000,000 500,000,000 500,000,000 500,000,000 500,000,000
$
56.42 $
61.50 $
67.03 $
73.07 $
79.64 $
86.81
8,862,106
8,130,372
7,459,057
6,843,172
6,278,139
5,759,761
Shares Outstanding (beginning of the year)
Plus: Shares Issued Through ESOP
Less: Shares Repurchased in Treasury
Shares Outstanding (End of the year)
282,200,000
3
8,862,106
273,337,897
273,337,897
3
8,130,372
265,207,528
265,207,528
3
7,459,057
257,748,474
257,748,474
3
6,843,172
250,905,305
250,905,305
3
6,278,139
244,627,169
3
40.76
117
244,627,169
3
5,759,761
238,867,411
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol
Current Stock Price
Risk Free Rate
Current Dividend Yield
Annualized St. Dev. of Stock Returns
Range of
Outstanding Options
Range 1
Total
Average
Number
Exercise
of Shares
Price
10 $
40.76
10 $
40.76
$
STJ
56.42
2.62%
1.18%
38.80%
Average
Remaining
Life (yrs)
3.60 $
3.60 $
B-S
Option
Price
23.16 $
25.07 $
Value
of Options
Granted
239
239