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Tickers in this Article: STJ, BSX, MDT, CRY, ANGO, CPTS, STE
It may be true that healthcare is something of a safe harbor when the equity markets go crazy, but that old saw comes with a little catch. You still need to pick the right healthcare stocks - investors in AngioDynamics (Nasdaq:ANGO) and Conceptus (Nasdaq:CPTS) likely feel a lot different about the notion of a safe harbor (both stocks are down almost 40% over the last year) than investors in Cryolife (NYSE:CRY) or Steris (NYSE:STE).

Where, then, does St. Jude Medical (NYSE:STJ) fit into this mix?

Maybe it fits the overall mood of the market, but I'd qualify St. Jude as potentially undervalued, but with some definite risk factors at present. While the company can still grow in the shadow of larger rivals like Medtronic (NYSE:MDT) and Boston Scientific (NYSE:BSX), that growth might be a little more challenging in the coming year.

First, The Quarter That Was
St. Jude's third quarter was neither a lost cause, nor a cause for celebration. Sales were up 17%, and both gross margins and operating margins improved, but the overall performance was in line with expectations. The company posted solid mid-teen growth in the cardiac rhythm management (CRM) business, while the atrial fibrillation and neuromodulation business continued to grow nicely (though from smaller bases). (For some more reading about margins be sure to check out Analyzing Operating Margins.)

Along with the earnings, the company also announced that it had borrowed $500 million from a credit facility to prepare to retire the company's $1.2 billion in convertible notes. This would seem to be one of the unfortunate side effects of the freeze-up in the credit markets; the company is borrowing at about 4.5% (the credit facility) to help pay down a convertible bond that had an interest rate of 1.2%, and that will clearly impact the bottom line a bit. (To learn more about convertible bonds, read Convertible Bonds: An Introduction.)

Can Nimble Beat Big?
I have to admit a certain personal fondness for St. Jude that goes back to my equity analyst days. Two of my favorite small-cap med-tech names were ultimately bought by St. Jude (Endocardial Solutions and Advanced Neuromodulation Systems), and so I've always rooted for this company.

But best wishes won't help when it comes to competing with Boston Scientific and Medtronic, however. Although St. Jude management boasts of its solid record of market share growth in the CRM market, I expect St. Jude's larger rivals to come out swinging in 2009. Medtronic is simply a no-nonsense competitor, and I expect Boston Scientific is going to put ever more emphasis on succeeding in CRM as a means of getting some positive news and momentum going again.

If St. Jude does lose some market share, I would expect to see the stock suffer some as a result. Should that happen, though, I'd encourage value-minded investors to take a long look. St. Jude has very solid growth opportunities in both atrial fibrillation and neuromodulation, and it's not like its CRM business is chopped liver (even if St. Jude is No.3).

Bottom Line
Remember, we are talking about a company growing at a mid-teens pace, producing an ROIC in the mid-teens, and trading at an EV/EBITDA multiple of only about 11. So, if St. Jude does skip a beat, opportunistic shareholders might want to take advantage of the stumble to pick up a solid (if not spectacular) player in a perpetually growing sector.

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