Looking Beyond Medtronic’s Earnings

By Harsh Chauhan - May 31, 2012 | Tickers: BAX, BSX, MDT, STJ, SYK | 0 Comments

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Medical apparatus maker Medtronic (NYSE: MDT) posted decent results in the fourth quarter, beating the Street on top line and meeting on bottom line expectations. The company had begun the fiscal year on a not-so-positive note as it was battling falling demand of its heart and spinal products in the U.S. However, Medtronic has been on an upward trajectory ever since, making the right moves to grow its business further.

We will now see how the company went about its business in the just-concluded fourth quarter and what to expect from it going forward.

Positive signs

Medtronic’s revenue jumped 4% from last year (in constant currency terms) to $4.3 billion in the quarter. The company rode the growth of its new products such as the Resolute Integrity drug-eluting stent, which is used to open-up arteries. The launch of this device propelled Medtronic’s cardiovascular business in the U.S. 24% higher since its launch in February. Moreover, the cardiovascular business grew an impressive 10% from last year and Resolute had an important role to play.

The company had started pressing the sales of the Revo pacemaker and the Resolute drug-eluting stent after its implantable cardioverter defibrillator (ICD) and spinal businesses took a hit last year because of low hospital budgets and concerns raised about the safety of its ICD device by a medical journal. The new products have done well to fill in the gap to some extent and have helped Medtronic deliver top line growth.

In addition, its ICD market in the U.S. has been stabilizing, as evidenced by a 5% sequential jump. The stability of ICD bodes well for Medtronic’s peers such as Boston Scientific (NYSE: BSX) and St. Jude Medical (NYSE: STJ). Boston Scientific struggled in its recently reported quarter as its ICD revenue fell 12% whereas St. Jude’s heart-rhythm business, which includes ICDs, was also grappling with problems such as low demand and safety matters.

The emerging markets play

However, it’s the company’s emerging market strategy which impresses me the most. One of CEO Omar Ishrak’s primary goals when he joined Medtronic almost a year back was to pursue global expansion. The company is doing just that under his stewardship as seen by a 7% growth in international revenue along with a really impressive 20% jump in emerging markets. Moreover, Medtronic’s international sales contributed 46% to the top line in the fourth quarter, an improvement over the 44% and 45% seen in the second and third quarters. Also, it has been growing its market share in emerging regions on the back of the success of its new products.

Medtronic is making a concerted effort to move lower on the cost curve. It is following a strategy of shifting some of its operations to low cost regions such as India and China. The company plans to cut 1,000 positions this year from areas such as Minneapolis and others. To make up for the downsizing, Medtronic will be adding 1,500 jobs this year in emerging markets such as China and India.

Valuation, dividend and takeaway

Medtronic is the most impressively valued company among its peers. The company’s trailing P/E of 10.81 beats its peers such as St. Jude, Stryker (NYSE: SYK) and Baxter (NYSE: BAX) who sport trailing P/E multiples 15.91, 14.48 and 13.2 respectively. Also, as far as earnings growth is concerned, analysts expect Medtronic to deliver again in future as shown by a forward P/E multiple of 9.55, which is again below that of its peers mentioned above.

But this is not the only spot where Medtronic trumps its rivals. Its dividend yield of 2.6% is matched only by Baxter and is way ahead of the 1.6% given away by Stryker.

Medtronic doesn’t offer only quality, it offers that quality without being too expensive. Also, a solid history of dividends along with stabilization of its key business and growth in emerging markets make it a stock on which you might consider spending your dollars. 

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