Investors run hot and cold on stocks all the time, but in all my time following St. Jude Medical (NYSE:STJ) I don't remember too many stretches where St. Jude was a favored name in the device space. That has all changed, though, and relatively quickly, as the company has managed to really sell Wall Street on the prospects for its deep pipeline. (For more on medical companies, check out Investing In Medical Equipment Companies.)

The company clearly has Wall Street's attention. Now the question is whether it can deliver on those promises. St. Jude does indeed have a deep pipeline and a good chance of being one of the most dynamic med-tech companies in the next few years (at least in terms of product launches). With so little underlying growth in many of its core markets, though, the company definitely has some work cut out for itself.

TUTORIAL: Stock Basics

Q1 Results: Not As Good As They Seem
St. Jude reported $1.38 billion in first quarter sales, and that was spot-on with analyst expectations. The company's stated growth rate of 9% looks pretty good (as does the currency-neutral rate of 7.7%), but the organic growth picture isn't so impressive. Organic growth for the first quarter was more on the order of 2%, or a bit more than 4% if the some year-ago CRM business is netted out. Now, low-single-digit organic growth is not that out of line with the rest of the medical device sector, but "matching the market" is not the expectations out there for this name.

Profitability was likewise not so impressive. Gross margin moved up a bit, but operating income growth was less than 5%. Some of this margin contraction was a byproduct of amortization tied to the AGA acquisition, but SG&A and R&D expenses both grew faster than revenue.

Looking at the company's reporting segments, cardiac rhythm management was flat (on a constant currency basis), and about 55% of total revenue. The cardiovascular business showed better growth, though (up about 7% on an organic basis), while neuromodulation was likewise up in the high single-digits and atrial fibrillation grew 13%. All in all, St. Jude seems to be holding its own with Medtronic (NYSE:MDT) and beating Boston Scientific (NYSE:BSX) in CRM, while gaining share in neuromodulation. (To read more on growth, see Steady Growth Stocks Win The Race.)

Big Opportunities; Big Expectations
St. Jude has already started to deliver on some of its pipeline, and more should be on the way relatively soon. The FDA recently approved the company's Trifecta valve, and while this is not going to capture the sort of attention that transcatheter valves from Edwards Lifesciences (NYSE:EW) and Medtronic have, it is a very solid valve product all the same (and St. Jude is working on a transcathter product).

Elsewhere, the company has already received approval for its ShockGuard technology (which prevents unnecessary ICD shocks) and should see approval for Quadra (a quadpole CRM system) soon. The company is also moving forward with a host of monitoring and imagine technologies that have some solid growth prospects, including fractional flow reserve monitoring and OCT imaging technologies. The latter two will face competition from Volcano (Nasdaq:VOLC), but St. Jude is presently in the lead in terms of market share.

The biggest question is how much growth these products can and will deliver. The new developments in CRM, for instance, may not do much more than ensure the company stays competitive and can continue to deliver low-single-digit growth. Likewise, FFR and OCT are big opportunities to a company like Volcano, but they may not offer enough juice to really move the needle for St. Jude. (For some help investing in the medical field, see A Checklist For Successful Medical Technology Investment.)

The Bottom Line
With all the excitement over St. Jude in the last few months, these shares have shot from modestly underappreciated to a bit expensive. St. Jude definitely has an above-average growth profile, but also above-average expectations. More aggressive investors may not be bothered by the valuation here, but more conservative types should probably look to names like Abbott (NYSE:ABT), Covidien (NYSE:COV) or Stryker (NYSE:SYK) for better growth-value tradeoffs. (To read more on the healthcare sector, read Investing In The Healthcare Sector.)

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