Persuasive arguments, even ones that continue to make sense, can go
out of favor for just about any reason - and sometimes for no good
Consider the school of thought that once drove the valuations of
medical device companies: we're all getting older. The Baby Boomers
are nearing retirement and needing everything from artificial
joints to new heart valves. We have 77 million of these folks
hitting that stage of life, as our first Baby Boomer turns 65 this
year. And over the next 20 years, the number of U.S. citizens age
65 and up will double to 79 million.
Such demographics notwithstanding, the argument for medical
device demand is apparently no longer valid, at least relative to
the stock market's current valuation of the industry. Go
To be sure, there is plenty to worry about in this industry,
given health care reform, product recalls and a challenging FDA
approval process. Yet there are many reasons to be optimistic about
a growing industry relatively unaffected by a tough economy.
Since the "aging Baby Boomer" theory held sway, the medical
device industry has only expanded. Medtronic (NYSE: [[MDT]]),
Minnesota's premier medical device company, has increased
everything from their revenue and reputation to their products and
pipeline. Yet MDT and other medical device companies have seen
their stock valuations drop right off the operating table.
Medtronic is the largest publicly traded company in their
industry with approximately $40 billion in market capitalization
and $16 billion in annual revenue. Currently that puts MDT trading
at 2.4 times sales. Back in 2000, when that "we're all getting
older" theme was popular, it traded as high as $60 a share - that's
12 times sales and 50 times forward earnings. Today the stock
trades in the mid-$30s at about 10 times forward earnings. That
makes MDT more of a "value stock" - meaning it is currently priced
more in relation to its balance sheet than its growth potential.
That's why we own this stock in our Core Equity portfolio.
Medtronic, as well as other health care companies in Minnesota,
such as St. Jude Medical (NYSE: [[STJ]]), Synovis Life Technologies
(NASDAQ: [[SYNO]]) and UnitedHealth Group (NYSE: [[UNH]]) are all
operating in an uncertain environment. A $20 billion annual excise
tax on the medical device industry begins in 2013 - a tax that will
have an estimated $150-$200 million impact on Medtronic. That's a
real cost, however the expansion of health insurance benefits to an
estimated 40 million people (albeit many of them children) could
increase demand to help offset that tax. Moreover, the excise tax
increases the barriers of entry for start- ups.
Medtronic is no start-up, of course. From its beginnings as a
cardiac rhythm management company, Medtronic has grown to seven
substantial operating segments: Its core Cardiac Rhythm Disease
Management division is accompanied by divisions for Spinal,
Cardiovascular, Neuromodulation, Diabetes, Surgical Technology and
Physio-control. The two fastest-growing divisions receiving the
most R&D funding these days are Neuromodulation and
Neuromodulation is a cutting-edge technology that uses
implantable products to perform what's referred to as "deep brain
stimulation". This targets debilitating diseases such as
Parkinson's syndrome, with potential for treatment of depression
and other mental health issues.
Medtronic entered the diabetes segment of the market in 1991
with the acquisition of MiniMed, Inc., a leading manufacturer of
insulin pumps. Medtronic now has 30 percent of the U.S. market in
Type-1 diabetes patients (childhood and adolescent-onset), but less
than 5 percent for Type-2. Type-2 diabetes generally occurs later
in life and is closely tied to obesity, an epidemic in the U.S.
Another key growth division is spinal products, as still-active
Baby Boomers nurse their aching backs. In addition to being a
demographic play in the U.S., Medtronic projects that its revenue
from emerging economies will grow from a current 7 percent of sales
to 20 percent. Beyond their existing businesses, Medtronic's
venture portfolio has invested $320 million in 60 companies, many
of them Minnesota-based.
So let's review: Global leader in medical technology. Improving
health for millions around the world. Past and potential growth
with proven demand. We're still getting older. And the stock trades
at ten times earnings. Although investment rationales come and go
(as do companies for that matter), many fundamental investment
rules still apply. Call me old-fashioned. For long-term growth
investors, there appears to be an opportunity right in our own
Author owns MDT in his Core Equity portfolio.
The information set forth herein has been derived from sources
believed to be reliable, but is not guaranteed as to accuracy and
does not purport to be a complete analysis of the securities,
companies or industries involved. Stock investing involves market
risk including loss of principal. Past performance is no guarantee
of future results. Opinions expressed herein are subject to change
without notice and are for general informational purposes only and
not intended to provide specific advice or recommendations for any
individual. To determine which investments and strategies may be
appropriate for you, please consult with Marks Group Wealth
Management or another trusted Investment Adviser.
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