We reiterate our Neutral recommendation on
Medtronic
(
MDT
) with a target price of $40.00.
The company's revenues and earnings during the fourth quarter of
fiscal 2012 surpassed the Zacks Consensus Estimates. Trends in the
previous fiscal have been divergent for Medtronic. While 75% of the
business grew at 8%, almost 25% declined 10%. However, management
confirmed that both the ICDs and spine markets are gradually
stabilizing, which will result in easier comparisons and should
drive growth over the coming quarters. The improvement was more
pronounced in the fourth quarter as 90% of the business grew at
7%.
Despite sustained weakness in its key ICD and spinal implants
businesses, we like the company's efforts to augment/diversify its
product range, expand into emerging markets for growth, and target
to return 50% of free cash flow to shareholders through dividends
and buybacks. We are optimistic that over the long term, stability
in the US ICD market along with a deep pipeline/portfolio that
includes - CoreValve, Resolute Integrity, Atrial Fibrillation,
renal denervation and peripheral businesses - will be the driving
factors for the company going ahead.
Medtronic continues to benefit from the recently launched
products. The company gained share in both the domestic and
international markets banking on Revo MRI SureScan pacemaker.
Besides, the atrial fibrillation business recorded over 20% growth
despite one-year completion of the US launch of Arctic Front
cryoballoon. The launch of RestoreSensor spinal cord stimulator in
the US (leading to 6 points of share gain on a sequential basis)
and Japan contributed to the growth of the neuromodulation
business. The company witnessed market share gain subsequent to the
recent launch of Resolute Integrity drug eluting stent for the
treatment of coronary artery disease, even in patients with
diabetes mellitus.
Medtronic has decided to focus on globalization due to the
opportunity rife in international destinations, especially in the
emerging markets. Management is targeting 20% (from the current
level of 11%) of its revenues from the emerging markets by fiscal
2015−16 that will result in additional 300-500 basis points of
revenue growth.
However, we remain concerned about the challenges of the ICD and
spinal segments. Sales of core metal construct products declined 3%
year over year (but grew 5% sequentially) during the reported
quarter. Infuse sales dropped 26% year over year in the quarter
including a 24% drop in the US market, in line with the third
quarter. This decline will continue till results from the Yale
study are available, due in the second quarter of the current
fiscal. The competitive landscape is quite tough with the presence
of players such as
Boston Scientific
(
BSX
) and
St Jude Medical
(
STJ
).
Our recommendation is backed by a Zacks #3 Rank (Hold) in the
short term.
BOSTON SCIENTIF (BSX): Free Stock Analysis
Report
MEDTRONIC (MDT): Free Stock Analysis Report
ST JUDE MEDICAL (STJ): Free Stock Analysis
Report
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