6 Reasons Why Needham Upgraded Boston Scientific

Shares of medical device maker Boston Scientific Corporation BSX received a top-notch rating Friday from Needham.

The Analyst

Needham analyst Mike Matson upgraded shares of Boston Scientific from Buy to Strong Buy with a $32 price target.

The Thesis

First, Boston Scientific retains a strong product cycle, allowing it to outperform peers, Matson said in a Friday note. (See Matson's track record here.) 

The company's key products include Resonate ICDs, the Watchman LAA closure device, new complex PCI products, the LithoVue single-use ureteroscope and Vercise DBS system, according to Needham. 

Second, Matson sees scope for margin expansion, as the company expects improvements in SG&A and R&D expenses in the coming years, with the SG&A improvement coming from shared services, process automation and cost reductions.

To reach the management goal of 28-percent operating margin in 2020, Matson said the metric has to improve by an average of 100 basis points per year.

Third, consensus estimates for 2018 are conservative, Matson said. Needham's 2018 revenue estimate requires 5-percent organic revenue growth, at the low end of the management's guidance range of 5-6 percent, and its earnings per share estimate is well above the consensus expectation.

Fourth, Needham said it has taken off Lotus from its estimates after the latest delay. Significant upside exists if it is relaunched, Matson said. 

Fifth, the firm expects Boston Scientific to have increased discretion for the use of its free cash flow, starting in 2018. After paying most of its litigation liabilities by 2018, the company is likely to use the cash flow to fund M&A or to return to shareholders, Matson said. Needham projects an increased possibility of additional acquisitions in 2018.

Finally, Boston Scientific shares are undervalued, according to Needham. 

The Price Action

Boston Scientific shares are up about 18 percent in the year-to-date period.

At the time of writing, the shares were advancing 2.34 percent to $25.62.

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Photo courtesy of Boston Scientific.