Post-Earnings Sell-Off has Created a Buying Opportunity in This Stock

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Medical devices maker Medtronic’s (NYSE: MDT) recently reported third-quarter results turned out to be a departure from normal. The company, for a change, missed the Street’s revenue expectations by a whisker but it did manage to deliver an earnings beat. The stock shed a total of 5% after earnings on fears of a slowdown in its European business while sluggish sales of heart and spinal devices added to the negativity.

Bad, but not so bad

Decline in sales of Implantable Cardioverter Defibrillators (ICD) and flat sales of pacemakers dragged down the company’s Cardiac Rhythm Disease Management (CRDM) business by 2% (in constant currency terms), while a 4% decline in revenue from spinal devices was another point of concern.  

Despite this, Medtronic reaffirmed its full-year guidance, which tells us that it is well-equipped to ward off the short-term slowdown through its diversified presence across the globe. CEO Omar Ishrak’s strategy of global expansion stood Medtronic in good stead as it recorded 8% growth in international sales, which now constitute 46% of its revenue.

Moreover, an overall revenue increase of 4% to $4.027 billion was commendable given the slowdown Medtronic faced in Europe as a result of low spending on new medical technologies and lower reimbursements. In addition, management is encouraged by stabilization of the ICD and spinal business in the U.S. and expects the launch of new devices to aid recovery further. Implant volumes in ICD increased 5% while the core spine business in the U.S. should see better days ahead on the back of new products and procedures.

A slew of positives

More importantly, Medtronic has been gaining market share even in a depressed market and this is a positive. Its new products enabled it to gain 8 points of market share in the pacemaker business while the drug-eluting stent (DES) business continued its impressive run and gained 4 points in the U.S. DES is turning out to be one of Medtronic’s primary drivers, as a 42% growth in sales drove the company’s coronary revenue up by 19%.

Medtronic has been ruling the DES space ever since it helped drive out Johnson & Johnson (NYSE: JNJ) from this business. Its Resolute DES has exhibited solid growth across the globe after Johnson & Johnson stopped production of its own Cypher stents and halted the development of the next generation Nevo stents. Thus, while Johnson & Johnson might be mourning the loss of a huge opportunity in stents, Medtronic has seized it with both hands.

Also, Medtronic is looking forward to launching its Evera ICD in summer and expects this to help arrest the slide in the ICD business. The advanced technology deployed in the upcoming ICD, along with the troubles of rival St. Jude Medical (NYSE: STJ), might help Medtronic gain more share in this market.

St. Jude had run into problems with its Riata ICD leads in late 2011 and had to recall them. If that wasn’t enough, the Food and Drug Administration criticized the company’s process of testing the Durata leads, which were meant to replace Riata, few months back. This could prove to be another shot in the arm for Medtronic as it looks to get its ICD business back on track.

The company’s strategy of global expansion saw it bring in 20% more revenue from emerging markets. Medtronic has recognized that penetration in emerging markets is still quite low, 8% to be precise. The company sees an $8 billion opportunity in emerging markets and that too at the margins it has in the developed markets. Medtronic’s strategy of introducing multi-tiered products, which address more than just the premium segment, is expected to help it sustain 20% emerging market growth in the long run.

Why you should buy

Opportunities are present in abundance for Medtronic across the globe, and short-term pressures shouldn’t cloud long-term judgments. Hence, the recent sell-off should be construed as a buying opportunity. A decent dividend yield of 2.2% at a trailing P/E multiple of just 13.6 times as against the industry average of 21.4 times seems enticing as the company is still witnessing growth.

Moreover, the reiteration of the full-year guidance tells us that the European problem won’t hurt the company’s earnings, which are expected to grow as evidenced by a forward P/E of 11.6 times. Medtronic’s long-term growth story still remains intact and a compelling valuation indicates that the price is right to accumulate more shares.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Medtronic. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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