Medtronic Earnings Demonstrate Strengths, Negative St. Jude Article Could Energize The Stock

Medtronic (NYSE:MDT) reported fiscal 1Q 2013 EPS of $0.85, in-line with expectations, with revenues also largely meeting forecasts ($4.01 billion vs. consensus estimate of $4.0 billion). New management is working on turning the company around, demonstrating that MDT is able to weather the storm of slowing and declining volume trends in key medical device markets such as ICDs (Implantable Cardioverter-Defibrillators) and products for spine surgery. In-line revenue was relatively impressive, up 2% against the negative effects of foreign exchange (sales would have increased by 5% on a constant currency basis). In fact, most large cap companies missed top-line estimates last quarter due to currency exchange issues. The quarter indicates that MDT continues to gain share in certain key business segments, and perhaps does not deserve the discount that the market is assigning to this value name. MDT trades at just 11x forward earnings vs. the large cap Med Tech companies at 12-13x. The company re-affirmed its EPS guidance range of $3.62-$3.70, meaning that if MDT catches up to its peers on a P/E multiple basis, the stock could rise to the mid-to-high $40 level. Analysts note that using cash flow yield, MDT has among the highest in the industry, suggesting that this stock could ultimately trade at a premium to peers. The company demonstrated on its earnings call this morning that the overall business is stable, with growth in key product segments such as cardiology, neuromodulation, diabetes, and surgical technologies. MDT’s anticipates 20% business growth in emerging markets and new management is focused on containing operating costs, which should result in expanding margins. (more…)