This Medical Device Stock Could Double your Money: STJ

In today's uneven stock market [1], investors end up overlooking many appealing companies. And right now, they are particularly ignoring growth stocks. This usually happens when fears surface that the global economy [2] could be heading into recession [3].

In times of economic stress, the health care sector is usually seen as a safe haven. But recently, many leaders in the industry have also been out of favor.

The passing of a historic health care bill in the United States last year has increased concerns that regulation will cut into profits of health care firms. Among those concerns: a 2.3% excise tax [4] on medical-device sales, set to begin in 2013. This is obviously a negative aspect, but it isn't likely to adversely affect the inherent appeal of companies with leading devices, technologies and global growth platforms.

Add it all up, and I see a rare opportunity for investors to buy quality health care stocks.

Medical device firm St. Jude (NYSE: STJ [5]), for instance, has such appeal. Besides a focus on growth, one of the company's main goals is to save and improve lives with its medical devices, which have become vital in the treatment of cardiac, neurologic and chronic-pain disorders. The company makes, for example, mechanical heart valves and implantable cardioverter defibrillators (ICDs), which detect cardiac arrhythmia and correct it by delivering shocks to the heart.

This wide range of technologically sophisticated devices is being widely adopted across the world, which has put the St. Jude on a remarkable growth trajectory. Last year, healthy sales of existing products, new product introductions and increased global reach resulted in a 10% sales growth to $5.2 billion, compared with $4.7 billion in the year before. In fact, 2010 marked the first time sales exceeded $5 billion. Earnings [6] growth was even better, rising more than 20% to $2.75 per diluted share. In addition, foreign sales -- which make up more than half of the company's total sales -- are growing in excess of 20% a year.

The company is also impressively profitable. Last year alone, it boasted a net profit margin [7] of almost 18%. This represented the highest margin [8] in the past five years, placing the company well ahead of rivals and the market in general. To put this into perspective, the health care industry as a whole has a net margin [9] of roughly 6%, while the S&P500 average is only about 12%.

Growth expectations for all of 2011 speak to St. Jude's operating consistency. Analyst projections are currently calling for sales growth of 10% to $5.7 billion and $3.27 in earnings per share, a growth of nearly 20%. But these levels of annual increases are nothing new to existing shareholders. In the past five years, annual sales and profit [10] growth have averaged 12% and 21.5%, respectively. The past decade is equally impressive, with annual sales growth of 16% and annual profit growth of 22%.

St. Jude also has a healthy new lineup of devices that will likely drive growth going forward. Included in the new product mix are neuromodulation devices that deliver small amounts of electricity to the nervous system to help treat chronic conditions such as Parkinson's disease and migraine headaches. Its management team estimates 18 new growth drivers should generate $18 billion in additional sales within the next five years.

In terms of archrivals, St. Jude competes against pure-play rivals such as Medtronic (NYSE: MDT [11]) and Boston Scientific (NYSE: BSX [12]). Medtronic boasts a market capitalization [13] of nearly $36 billion, which is close to three times St Jude's market cap of $12.5 billion. But despite an equally impressive lineup of medical devices, its already substantial size is a barrier to double-digit growth. Boston Scientific has a current market cap of less than $9 billion, but has had obstacles to overcome, including the acquisition [14] of Guidant back in 2006, which hamstrung it with too much debt, and manufacturing problems that continued well after the purchase was completed.

Risks to Consider: As Boston Scientific can to, the market for medical devices is extremely competitive. The industry is heavily regulated and, to make things worse, the 2.3% excise tax on medical devices will affect the entire medical device sector. Despite these concerns, St. Jude has developed many market-leading technologies, while diversification [15] overseas should lessen the risk of these new U.S. regulations derailing its overall growth.

Action to Take --> If the coming decade for St. Jude turns out to mirror the past 10 years, then St. Jude's stock is worth more than twice the current share price. I believe I'm being conservative when I project annual cash flow [16] growth of 16% in the next decade. At these levels, the stock would be worth more than $76 per share, or double current levels. This means it's still smaller than Medtronic, which demonstrates just how achievable these seemingly aggressive growth projections for the coming decade can be. With this in mind, investors should consider taking advantage of the stock's current lows, because it is set to bounce back in a big way.