Medtronic Still at Neutral - Analyst Blog


We recently reinstated our Neutral recommendation on Medtronic, Inc. ( MDT ). While we are, to some extent, relieved with signs of stability following improvement in Medtronic's core Cardiac Rhythm Disease Management (CRDM) and pacing segments, challenges still loom large in the spine market which remains sluggish, affecting the company's overall performance. The stock currently carries a Zacks Rank #3 (Hold).

Why Neutral?

After a disappointing start to fiscal 2014, Medtronic managed to beat estimates in the second quarter of the year.  The company reported adjusted earnings per share (EPS) of 91 cents, up 3% year over year and a penny ahead of the Zacks Consensus Estimate. Revenues came in at $4.194 billion, up 3.3% at CER, beating the Zacks Consensus Estimate of $4.173 billion.

We are encouraged by the improvement observed in Medtronic's core CRDM and pacing segments. The company also witnessed strong CoreValve transcatheter aortic heart valve sales in the international market. This led the upside in its Structural Heart business. We are also impressed with several recent growth initiatives taken by Medtronic which includes the company's attempt to rebuild itself as a health care service provider.

On the tepid side, gross margin pressure still remains a major concern. Spine sales continued its sluggish trend. Moreover, headwinds such as unfavorable currency movement and global economic uncertainties remain.

We are also concerned about the recent U.S. Food and Drug Administration's (FDA) warning regarding certain Medtronic devices. As per the announcement, the company's recently initiated voluntary field action related to certain guidewires were classified as a Class I recall by FDA.

However, Medtronic is resorting to all possible means to boost growth. This includes penetration into the international markets, expansion of portfolio and restructuring of initiatives, which should benefit the company over the long term.

Meanwhile, Medtronic has increased its focus on the emerging markets and is targeting higher revenues from this region. The company is also committed to its aim of returning 50% of its free cash flow to its shareholders, along with undertaking suitable acquisitions, to augment growth.

Other Stocks to Consider

While we prefer to remain on the sidelines regarding Medtronic at present, some better-ranked medical stocks worth a look include Cepheid ( CPHD ), CryoLife Inc. ( CRY ) and AngioDynamics Inc. ( ANGO ). While Cepheid and CryoLife sport a Zacks Rank #1 (Strong Buy), AngioDynamics carries a Zacks Rank #2 (Buy).

ANGIODYNAMICS (ANGO): Free Stock Analysis Report

CEPHEID INC (CPHD): Free Stock Analysis Report

CRYOLIFE INC (CRY): Free Stock Analysis Report

MEDTRONIC (MDT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: ANGO , CPHD , CRY , EPS , MDT

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