Catalysts That Could See Medtronic Jump After Earnings

| About: Medtronic plc (MDT)

By Doug Ehrman

Medtronic Inc. (NYSE:MDT) is scheduled to release earnings on May 22, 2012, and ahead of that announcement, the company is looking strong. Given the relative position of the company amongst its peers, there are viable alternatives for every level of risk tolerance, regardless of whether one is reading this before or after earnings have been released - although maximum flexibility is available when one makes a plan early in the process. Medtronic has a strong history and stacks up well against its peers; it should be considered as a core portfolio holding.

Earnings Expectations And History

The average of analyst estimates for Medtronic is 98 cents per share. This would represent an increase of 8.9% relative to the same quarter a year earlier. This projection contains a rise in profits to $3.45, representing an increase of 2.4%. It also includes an expected decline of 1.6% in revenues, bringing that figure to $4.23 billion. This level has remained stable for the past month, having risen from 97 cents prior to that.

Also forming an element of these expectations is the ratings distribution: 11 analysts rate the company a buy, 11 a hold and only 1 has a sell rating on the company. Medtronic met expectations in its most recent earnings announcement and surpassed expectations in the quarter before that. Investors should not expect a dramatic reaction if the company meets expectations, but any significant beat could be the catalyst for a solid jump. A miss would be a negative for the stock, but barring a significant shortfall, a major price shock is not expected.

Additional Catalysts

In addition to the earnings announcement, the recent conclusion of an investigation by the Department of Justice may prove to be a positive catalyst for the stock. The investigation that began in October 2008 was focused on the company's Infuse Bone Graft products and accusations that the company had improperly made payments to individuals who authored favorable research on the products. The investigation was concluded having found no wrongdoing on the part of the company. Also involved in the inquiry was the U.S. Attorney's Office for the District of Massachusetts, which commented that it was pleased to be able to put the matter to rest. While not a major source of drag on the stock, the removal of this negative pressure may clear the way for some positive move, particularly if the company releases positive earnings news. Litigation risk is always a concern for medical device companies, so when a potential pitfall is overcome, it stands as quite positive news.

The Peer Group

The medical device sector is one of the most dynamic in the marketplace and contains several important companies. When the fundamental metrics of Medtronic and its peers are considered, the company looks very strong. Beginning with the company's valuation as measured by the trailing twelve month price-to-earnings (P/E), Medtronic has a P/E of 11.6 relative to a P/E of 17.5 for Boston Scientific Corp (NYSE:BSX), a P/E of 17.4 for Johnson & Johnson (NYSE:JNJ), a P/E of 15.3 for St. Jude Medical Inc. (NYSE:STJ), a P/E of 19.0 for Abbott Laboratories (NYSE:ABT) and an industry average of 20.4.

While the growth element improves the picture for St. Jude, giving that company a price-to-earnings over growth ((NYSE:PEG)) ratio of 1.15, Medtronic is close behind with a PEG ratio of 1.7 relative to 2.6 for Boston Scientific and 2.1 for Johnson & Johnson. To put this latter statistic in proper prospective, it is useful to look at the year-over-year quarterly revenue growth for each company. This figure is 1.6% for Medtronic relative to -3.1% for Boston Scientific, -0.20% for Johnson & Johnson and 1.4% for St. Jude. The point is that a portion of this statistic is driven by growth and the other by P/E; when all three are considered in tandem, Medtronic is the strongest.

An additional metric that is of particular importance is each company's operating margin, as it gives a good indication of how efficiently the company is run and how much skill is possessed by upper management. Medtronic has an operating margin of 28.2% relative to 12.4% for Boston Scientific, 24.9% for Johnson & Johnson and 24.4% for St. Jude. Therefore on this metric as well, Medtronic sits at the top of its peer group.

Finally, the income element of each stock should be considered. While the growth figures are not overwhelming, as seen above, there is the potential for income with some of these companies. Medtronic offers a dividend yield of 2.6% relative to no dividend for Boston Scientific, 3.9% for Johnson & Johnson and 2.4% for St. Jude. As such, Medtronic appears quite attractive at current levels.

The Trade

At this point, it is important to put all of this information into the proper context so as to know how to proceed. Given the attractiveness of the stock, it should be a part of a well-diversified portfolio. While buying a stock ahead of earnings does pose certain risks, a large move is not expected off of the earnings announcement unless the news is dramatic.

The aggressive choice would be to buy the stock in hopes of a positive pop in the week ahead, just as the most conservative option is to remain uninvested until after the announcement. In these circumstances, the most balanced approach is to buy a portion of one's intended position ahead of earnings and round out the position after. This provides exposure to any potential move while still affording a measure of protection.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.