Medtronic Hasn’t Lost its Charm Yet
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Rock solid, dividend dynamo and stable. These are the words that come to my mind when I think of medical devices maker Medtronic (NYSE: MDT). However, the leader in heart-rhythm devices has been put under the scanner of late. There have been concerns about its top line growth and safety issues regarding its drug pumps. But since it's Medtronic, one can always expect the company to endure difficult situations well and bounce back.
Hence, it will make sense to look beyond these clouds and see what lies in store for Medtronic ahead after it posted a decent first quarter.
The company’s implantable cardioverter defibrillator (ICD) business has been under pressure since last year due to falling demand, safety concerns and tight hospital budgets. Medtronic’s management states that the segment is in consolidation mode as of now. The overall market for ICD’s declined 4% in the recently-reported quarter, which has been its best performance for the last year and a half.
But Medtronic performed above the broader market as its sales fell just 3%. While this might not be a reason to cheer, one can take heart from the fact that implant volumes went up 4% in the quarter. However, spending by hospitals is still on a tight leash as they have been cutting down on bulk purchases and the stabilization is expected to continue.
St. Jude’s pain, Medtronic’s gain
However, safety issues over Durata and Riata defibrillators made by St. Jude Medical (NYSE: STJ) might prove to be a shot in the arm for Medtronic. A Wall Street Journal article states the risks that come along with St. Jude’s defibrillators and also references studies carried out by Dr. Robert G. Hauser, who is a device-safety overseer at the Minneapolis Heart Institute.
While Medtronic has a history of safety issues with its ICD’s, it has bounced back with its Protecta ICD, which has been gaining acceptance. In addition, the company has improved its market share in ICD replacement in the U.S and this might go north if St. Jude doesn’t come out of its troubles soon.
A Resolute product
The Resolute Integrity drug-eluting stent (DES), which is used to open-up arteries, has also been gaining rapid traction with customers as evidenced by a 16% jump in coronary revenue. This product has enabled Medtronic to capture the drug-eluting stent market well.
The success of Resolute had also played a role in driving out one time DES market titan Johnson & Johnson (NYSE: JNJ) last year when the company decided to put a full stop on its Cypher stents. And Medtronic’s stent has more room to run in international markets as well, which should push its top line higher.
A bump on the road
There might be a problem, however, with implanted pumps made by Medtronic, which have been a bone of contention for almost five years now. The Food and Drug Administration (FDA) again has a problem with the SynchroMed II drug pump due to corrosion. The same drug pump was in the midst of a recall last year due to battery failure issues but the company fixed that one.
This time as well, Medtronic is looking to make amends, and CEO Omar Ishrak says that this won’t impact the company financially. Medtronic is required to correct a number of violations as pointed out in the FDA letter, without which, it won’t approve devices in the said class. However, Medtronic has satisfied the FDA on previous occasions with the steps taken and I hope it does the same again.
A mix of good and bad
Turning to other areas in the spinal business, management is of the opinion that stabilization is in progress. The U.S. Core Spine market has been improving slowly for the last three quarters and Medtronic expects to gain traction with its new products. The company’s Surgical Technologies business gained market share on a sequential basis and expects to carry on this momentum forward.
However, a question mark over the safety of Infuse, Medtronic’s bone-growth product, which was raised by a medical journal last year, is still weighing on its BMP business. Revenue from this segment declined a whopping 20% in the previous quarter. Medtronic is looking to set this one right and is awaiting the outcome of an independent review by Yale University in the next few months.
Considering that the BMP business makes for roughly 3.5% of Medtronic’s overall revenue, I expect the other growth areas to make up for the decline in this segment going forward if a concrete resolution isn’t found out.
Cash machine and dividend dynamo
The discussion so far has been on Medtronic’s businesses. Apart from this, the company is very well known for returning cash to shareholders. Medtronic is a free cash flow generation machine, generating more free cash flow than net income. It repurchased $470 million of its common stock in the first quarter and has authorization to repurchase another 46 million shares.
Moreover, Medtronic is also very well known for paying out a nice dividend, which is better than many of its peers. It recently hiked its quarterly dividend by 7% and sports a dividend yield of 2.6%.
The bottom line
Medtronic has gained a lot of ground over the last year, appreciating 30%. It has bounced back from safety concerns over its devices on numerous occasions through better products or redress of the concerns. The company is highly focused on delivering shareholder value and does so by innovating new products and expanding its presence globally.
While the current economic situation might be an overhang, it should be temporary. Healthcare spending in emerging markets has a long way to run and Medtronic is doing its best to gain from it by expanding in such areas. Keeping these factors in mind, I believe Medtronic still has room for growth in the long run and delivering more value to investors.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson, Medtronic, and St. Jude Medical. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.