Markets

St. Jude Faces Rating Action by Moody's Post Thoratec Buyout

St. Jude Medical 's STJ senior unsecured ratings were recently downgraded to Baa2 from Baa1 by Moody's Corp MCO following the completion of the Thoratec acquisition. The agency believes that the $3.3 billion acquisition has significantly increased St. Jude's leverage, which currently stands at more than 4.0 times.

Although the rating outlook is negative, Moody's believes that St. Jude's strong top-line growth and cash flow generating ability will help it to rapidly de-leverage over the next 24 months. In fact, the rating agency expects debt/EBITDA to decline to 2.5 times within this period, which aptly reflects its Baa2 rating.

We note that St. Jude enjoys a significant presence in the cardiac rhythm management (CRM) market, owing to products and solutions such as Quadripolar CRT-D and CRT-P technologies, MultiPoint Pacing CRT technology, remote monitoring capabilities and CardioMEMS HF System.

The buyout will significantly augment St. Jude's product portfolio by adding Thoratec's products and technologies like HeartMate II, HeartMate III and HeartMate PHP. The acquisition will also improve St. Jude's competitive position as well as diversify its product portfolio, lowering dependency on the slowing CRM market.

Meanwhile, Thoratec is an established player in the global Ventricular Assist Device (VAD) space, which is currently valued at about $750 million. The CE Mark approval of its percutaneous heart pump allowed it to enter aglobal marketexpected to exceed $300 million in 2016.

The acquisition hence paves way for St. Jude to foray into new markets, which in total, are valued in excess of $1 billion and are likely to exhibit an annual growth rate of around 10%. St. Jude is also positive on broadening Thoratec's product pipeline in these markets with the former's CardioMEMS, remote monitoring capability and catheter technology.

St. Jude expects the transaction to boost its organic sales and adjusted earnings per share (EPS), starting from 2016. However, according to Moody's, the core CRM (which accounts for approximately half of St. Jude's top line) is expected to remain sluggish over the next several quarters, which is major headwind for St. Jude.

Moreover, the company is not accustomed to large takeovers. Hence, integration will remain an overhang on the operations of St. Jude over next few quarters.

In such a situation, Moody's believe that St. Jude may find it difficult to sustain the appropriate leverage of 2.5 times. Moreover, if St. Jude falters, another rating downgrade is inevitable.

Zacks Rank & Key Picks

Currently, St. Jude has a Zacks Rank #2 (Buy). Other favorably ranked stocks include ICU Medical Inc ICUI and NuVasive Inc NUVA , both sporting a Zacks Rank #1 (Strong Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

MOODYS CORP (MCO): Free Stock Analysis Report

ST JUDE MEDICAL (STJ): Free Stock Analysis Report

NUVASIVE INC (NUVA): Free Stock Analysis Report

ICU MEDICAL INC (ICUI): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

ICUINUVAMCO

Other Topics

Stocks

Latest Markets Videos

Zacks

Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

Learn More