Medtronic's Healthy Future - Barron's

Medtronic (MDT) was once a must-own stock for its growth and its status as health-care pioneer. Today, the company trades at a ten-year low of $33.40 and has lost market share to rivals Boston Scientific (BSX) and Abbott Laboratories (ABT). But Wall Street's got it wrong, writes Barron's Neil A. Martin, and the company isn't getting enough credit for recent transformations.

Medtronic has both cash and ambition, and wants to create and acquire new products and technologies for its core cardiac, spinal, diabetes and neuroscience treatments. Management is laying out a plan to counter pressure on sales and profits from likely health-care reform, and to stem market-share losses. The company has focused on cost controls, with potential savings of over $1B by 2012. Investors should also know Medtronic has committed to paying out over 40% of its cash flow in stock buybacks and dividends (the stock currently yields 2.2% but an increase is possible). All of this could help push the stock up 25-30% in the next 12 months.

The company's products are used in over 120 countries, and its work in fields such as depression, obesity, epilepsy and diabetes could help Medtronic increase its earnings by 11% annually over the long term. Not that Medtronic is without its problems; sales growth in its critical cardiac-rhythm-disease unit fell to 2% in the latest fiscal year from 23% in FY '03, in part because of a voluntary 2007 recall of its Sprint Fidelis defibrillation leads. The recall shrank the company's market share in implantable cardiac devices to 46% from 53% while its cardiac-stent business faced strong competition. The problems in the unit are one of the reasons Medtronic is working to beef up its neuromodulation unit, where revenue could grow 13-15% annually in the next five years and which has had recent success in treatments for Parkinson's disease.

The company is trading at 11.4 times FY '09 estimates, and 10.5 FY '10 estimates of $3.20/share. That's its lowest P/E ratio in ten years, and well below both the 13 P/E ratio of the S&P 500 Health Care Equipment and Services index and the P/E of 15 for the broader S&P.

Medtronic will report fiscal 2009 results on Tuesday.

• To Levy, of Deutsche Bank Securities, rates the stock a Buy, with a twelve-month target of $41.
• Rick Wise, of Leerink Swann, rates the stock Market Perform. "Longer term, for investors who have the patience to watch this scenario unfold, Medtronic is one of the least expensive stocks in the health-care universe."
• Bill Frels, of the Mairs & Power Growth Fund, sees the stock at $60 in the next three years.

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• At the end of March, Boston Scientific's heart stents were shown to be less effective in studies than those of Abbott Laboratories, Johnson & Johnson (JNJ) and Medtronic. Stents comprise a $4B market.
• Medtronic: FQ3 EPS of $0.71 beats by $0.01. Revenue of $3.5B (+2.6%) in-line. (PR)
• "Medtronic Inc. is a company in a position to take advantage of the favorable swings within the healthcare industry while avoiding the negative trends snaring many medical device and diagnostic companies," writes Bullish Bankers. The company has "strong, innovative product pipeline, shrewd management," and macroeconomic trends in its favor.

Comments

[fcharlie:]

Medtronic is priced today as if it will only grow at 2% annually from now into perpetuity. I find that hard to accept considering the demographics of this country.

May 17 11:12 AM

[Vobogeck:]

This is an excellent summary of the case for buying Medtronic, but I would point out one minor inaccuracy. Medtronic's current price of $33.40 is not a ten year low, it is a six-year low. Its 52-week low of $24.06 was a ten year low.

However, its P/E ratio is at a ten+ year low and with a ten year earnings growth rate of 18% pa it is a solid buy under $45 for long term dividend investors.

May 17 02:05 PM