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Summary

  • Patient investors should be rewarded in the next 12 to 18 months with a better-than 15% premium on the basis of long-term margin expansion.
  • If there are any concerns with Medtronic, it has to do with changes in the health-care industry.
  • It's nonetheless impressive the manner in which management has put most (if not all) of the company's past concerns to rest.

Med-tech giant Medtronic (NYSE:MDT) will report fourth-quarter and full-year earnings Tuesday. The stock closed Friday at $60.39, up 0.8%. Shares are up 5.7% year-to-date. But since the middle of February, Medtronic has posted 7% gains.

On Tuesday, the company will once again try to convince a jittery market that it deserves its lofty valuation. With shares trading at near 52-week highs, growth has returned and investors are rejoicing the slight uptick in the market for medical procedures. Despite the recent gains, there's still a lot to like with this company, which has done well fighting off stiff competition from rivals Johnson & Johnson (NYSE:JNJ) and Boston Scientific (NYSE:BSX).

If there are any concerns with Medtronic, it has to do with changes in the health-care industry. It remains to be seen to what extent the company is able to adjust to performance-impacting law changes imposed by the affordable care act (Obamacare). It's nonetheless impressive the manner in which management has put most (if not all) of the company's past concerns to rest. Some of which included headwinds that have kept down revenue and earnings growth. Investors are hoping for that trend to continue Tuesday.

The Street will be looking for earnings of $1.12 per share on revenue of $4.58 billion, which would represent roughly 3% year-over-year revenue growth. Full-year earnings is projected at $3.82 per share, up roughly 2%, while full-year revenue is projected to roll in at $17 billion, up 2.6% year-over-year. And we expect the company to post a beat on both the top and bottom lines.

In the February quarter, the company delivered a beat on revenue, which advanced 4% year-over-year to $4.1 billion. Adjusted earnings arrived at 91 cents, down 2% year-over-year. But was in line with Street estimates. Revenue was spurred by 2% growth in cardiac rhythm management (CRM) sales, which was a surprise. The company posted a 2% year-over-year increase in cardiology, which was somewhat downbeat. But Medtronic made up for this with a 7% surge in neuromodulation, 11% jump in surgical tech and 16% increase in diabetes.

All told, the entire business, including all segments, is on solid footing. And management remains committed to growing each segment to operate consistently to drive long-term revenue and earnings growth. Although they've positioned the company to achieve these goals, it's not going to be easy. Aside from the pressure added by Johnson & Johnson, Medtronic has to deal with St. Jude Medical (NYSE:STJ) and Boston Scientific, which have made significant ground in both the pacemakers and Implantable Cardioverter Defibrillators (NYSE:ICD) markets.

Recall, in the February quarter, both St. Jude and Boston Scientific posted revenue growth of 7%. Medtronic's ICD revenue was only 1%. Although one quarter does not spell doom for the market leader, it does show that the winner of the ICD market has yet to be determined. So despite the confidence presumed by the stock price, things aren't going to get easier.

But that's where management has consistently stepped up to the plate and delivered solid base hits. One of which being the company's entry into the transcatheter heart valve (CoreValve) product, which was recently approved for sale by the Food and Drug Administration.

Equally impressive was that no one expected Medtronic to receive approval as fast as it was granted, which put the company ahead of its pace to gain market adoption. And industry experts believe Medtronic's CoreValve can become a worthwhile threat to competing products from Edwards Lifesciences (NYSE:EW).

On Tuesday, this is one area of the conference call that should be a compelling listen. It's also encouraging to see the degree to which Medtronic's capital equipment for spine surgery are being embraced by hospitals. Medtronic has successfully differentiated itself in terms of offering efficient procedures and advancing surgical procedures.

With the stock trading at around $60, I would be a buyer here ahead of earnings. Investors with patience should be rewarded in the next 12 to 18 months with a better than 15% premium on the basis of long-term margin expansion and advances in the company's CoreValve business.

Source: Why Medtronic Is Heading To $70