Tickers in this Article: STJ, MDT, SYK, BSX, JNJ, EW, ABT
Investors looking for good growth stories in big-cap med-tech, are not exactly spoiled for choice. Formerly reliable growers like Medtronic (NYSE:MDT), Stryker (NYSE:SYK) and Boston Scientific (NYSE:BSX), are still struggling to reignite growth and quality blue-chips, like Johnson & Johnson (NYSE:JNJ), are muddling through a low-volume environment.

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Against that backdrop, St. Jude (NYSE:STJ) is not so disappointing. What's more, while this company does have several formidable competitors hard at work in taking away their business, St. Jude also has a compelling portfolio that could deliver growth re-acceleration in a few years.

Ho-Hum Third Quarter
Expectations were not high for St. Jude, going into this quarter, and St. Jude did not deliver a lot of growth. Reported revenue rose more than 11%, but organic growth was sub-2%. The company's ICD business remains weak and neuromodulation is looking a little disappointing. Atrial fibrillation delivered 20% growth, though, and the cardiovascular business is getting a big boost from the AGA Medical acquisition.

Profitability was pretty mediocre, as well; gross margin improved a bit, but adjusting operating income was up only about 9%. Investors might find some consolation in the fact that St. Jude continues to spend healthy amounts on R&D, an important part of maintaining long term competitiveness. (For related reading on R&D, see Buying Into Corporate Research & Development (R&D)).

CRM Needs a Jolt
The best thing that can be said about the CRM market is that St. Jude seems to be holding on to, if not gaining, market share. Industry-wide performance has been poor, as an ongoing DOJ investigation has altered sales and purchasing practices, but there are also concerns relating to emerging guidance, as to just who should get an ICD and whether that will shrink the market.

St. Jude has had some issues in this market with some of its leads, and the delay in U.S. approval for its new quad pole has been disappointing. Nevertheless, Boston Scientific is doing quite poorly right now and though Medtronic has some compelling technology, St. Jude is holding its own in this lucrative market.

A Future Worth Waiting For
Bears are going to jump on the poor ICD market and the deceleration in neuromodulation, but there are certainly still some reasons to be positive on this company. For starters, the atrial fibrillation business is working well and the company seems to be in good shape, relative to competitors like Medtronic and JNJ. Longer term, while the company is behind Medtronic and Edwards Lifesciences (NYSE:EW) in transcatheter heart valves, St. Jude is developing its own product and early reports have been encouraging, though it is important to emphasize "early."

Longer term, this company has an exciting pipeline. More specifically, this is a company with multiple billion-dollar shots on goal, in markets like heart valves, hypertension, and migraine, and a few more multi-hundred million-dollar opportunities as well. Rivals like Medtronic, JNJ, and Abbott (NYSE:ABT) may well draw some of that momentum off to their own products, but the fact remains that St. Jude has been very active in building up its clinical efforts.

The Bottom Line
St. Jude has gotten considerably cheaper this year, as investors have reacted to very sluggish organic growth by bailing out of the stock. For long-term value-oriented investors, that is a great set-up. Even if St. Jude only musters single-digit growth over the next ten years, the stock is undervalued enough to be worth owning today. If one or more of these pipeline projects really hits a home run and the company can post free cash flow growth in the high single digits, or higher, then it could be a real winner for patient investors. (Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery. For more, see Free Cash Flow: Free, But Not Always Easy.)

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