Medtronic Strength Could Continue Through Earnings Next Week

Shares of Medtronic (NYSE:MDT) are expected to be strong today and through the company’s fiscal 1Q 2013 earnings report next week, with a big upgrade from Argus Research from Sell to Buy this morning. Argus raised its price target to $48, significantly above the Street average of $43, and others could follow suit as this beleaguered stock may be back on track to becoming a growth story again. Importantly, yesterday’s announcement that competitor St. Jude Medical (NYSE:STJ) is getting further scrutiny from the FDA on its implantable defibrillator product line due to potential malfunctions, could be very good news for MDT. When the company announces earnings next week, a report of market share gains in its ICD (Implantable Cardioverter-Defibrillator) business could send the shares higher. Notably, MDT has easy comparisons in this segment given the company’s weak ICD performance last year. Dr. Robert Hauser of the Minneapolis Heart Institute has been a key watchdog for St. Jude’s ICD issues, and is expected to keep pressure on the FDA and St. Jude to correct the problems. In other words, the problem is likely to get worse for STJ, and could remain an important growth opportunity for MDT in the ICD market as doctors will increase their use of products perceived to be safer.

Meanwhile, MDT is in turn-around mode, hiring new CEO Omar Ishrak earlier this year. Mr. Ishrak is a former GE executive known for his strong execution and operational track record. Executives at Medtronic note that the new CEO has taken charge, the company is re-energized, and operating efficiency is at the forefront, which indicates that MDT is going to deliver on earnings expectations. While Wall Street analysts are split on the name (14 Buys, 11 Holds, and 1 Sell), most have come out to admit that the upcoming quarter is likely to be strong. Given the mixed views on the stock, good performance could result in upgrades of MDT into year-end. In addition to the ICD windfall, growth for the company is also expected to come from innovative treatments, such as the company’s new stents and leading renal denervation product line (nerve ablation for uncontrolled hypertension), which it acquired when it bought Ardian Inc. in early 2011.

New management that is operationally focused, innovative products, a little luck in the ICD market, and low expectations are reasons to own the stock. MDT trades at just 11x forward earnings vs. the large cap Med Tech companies at 12-13x. Given earnings expectations in the $3.70 range, MDT catching up to its peers could be worth an additional $7 per share. Analysts note that by valuing the shares with cash flow yield, MDT has among the highest in the industry, suggesting that this stock could ultimate trade at a premium to peers. If fiscal 1Q 2013 earnings support that the business is back on track, shares of MDT are likely to continue their upward climb.

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