Boston Scientific Corporation (NYSE:BSX) stock, even after its recent rally, looks like a steal after a $600 million settlement last week put an era of extreme litigation risk firmly behind the medical device-maker. Despite sitting at 7-year highs, the company’s sub-$17 price tag is a far cry from all-time highs above $40 per share in 2004.
The company is taking steps to get back to those levels, although admittedly $40 a share is more than a few years out of reach.
But you’ve gotta start somewhere, and the 27% rally BSX stock has posted thus far in 2015 is good enough to trump the S&P 500‘s year-to-date returns by about 25 points.
BSX – Guidant Settlement: The Monkey’s off the Back
Anyone who has followed BSX stock even casually throughout the past decade is probably familiar with the comically unwise acquisition of Guidant in 2006 for $27 billion. The deal, announced in January of 2006, was, by October, already being hailed by Fortune as the second-worst deal of all-time.
After nearly a decade of pain related to the purchase, BSX finally put the deal to rest last week. BSX stock had been weighed down by litigation costs for years, as bitter rival Johnson & Johnson (NYSE:JNJ) sued the pants off of Boston Scientific for stepping in and out-bidding JNJ, which was against the terms of JNJ’s existing buyout agreement with Guidant.
JNJ wasn’t pulling any punches, going after Boston Scientific for $7 billion. Boston Scientific instead settled for $600 million last week — far below what investors expected and an amount small enough to justify an instantaneous 12% surge in BSX stock.
Guidant, which was in and of itself riddled with financial and legal problems due to lawsuits from flawed heart devices, caused BSX to write down about $9 billion in goodwill between 2006 and 2012, according to the Wall Street Journal.
Last year, BSX stock faced an uphill battle as it hemorrhaged $4.9 billion into litigation expenses alone.
Going forward, with the migraine known as the BSX-Guidant merger largely gone, Boston Scientific stock offers fine exposure to the healthcare sector. Healthcare has been the strongest-performing of the 10 major stock sectors over the last year, rallying 23% and outperforming the S&P by nine percentage points.
When you’re one of the biggest players in the medical devices industry, R&D spending is an integral part of doing business, and BSX is already ramping up spending. In 2014, the company spent 11.6% of its revenue, or $861 million, on research and development, up slightly from 2013, when BSX funneled 11.4% of revenue into R&D.
With less money allocated to litigation expenses, that number could (and should) increase yet again in 2015.
And with BSX stock trading at less than 17 times forward earnings estimates, shares trade at a discount to Abbott Laboratories (NYSE:ABT) — a direct Boston Scientific competitor which changes hands for a forward P/E of 20.
As Boston Scientific puts the Guidant nightmare behind it, BSX stock should enjoy tailwinds for years to come as it channels litigation savings into new investments and passes the rewards onto shareholders.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
