With Medtronic Focused On the Future, Is It Time to Buy the Stock?

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Medtronic (NYSE:MDT) serves hospitals, physicians, clinicians, and patients in approximately 140 countries. It manufactures and sells device-based medical therapies worldwide. The company operates in two segments, Cardiac and Vascular Group, and Restorative Therapies Group.

The Cardiac and Vascular Group’s products include pacemakers; implantable defibrillators; leads and delivery systems; ablation products; electrophysiology catheters; products for the treatment of atrial fibrillation; information systems for the management of patients with cardiac rhythm disease management (CRDM) devices; coronary and peripheral stents and related delivery systems; therapies for uncontrolled hypertension; endovascular stent graft systems; heart valve replacement technologies; cardiac tissue ablation systems; and open heart and coronary bypass grafting surgical products.

The Restorative Therapies Group offers products for various areas of the spine; bone graft substitutes; biologic products; trauma, implantable neurostimulation therapies; drug delivery devices for the treatment of chronic pain, movement disorders, obsessive-compulsive disorder (OCD), overactive bladder, urinary retention, and fecal incontinence and gastroparesis; external insulin pumps; subcutaneous CGM systems; products to treat conditions of the ear, nose, and throat; and devices that incorporate advanced energy technology.

It also manufactures and sells image-guided surgery and intra-operative imaging systems, and provides Web-based therapy management software solutions.

The company’s stock has been on an absolute tear, nearly doubling in the last two years. The company recently provided an update to its financial standing, earnings, and guidance for 2014. The purpose of this article is to discuss the company’s current standing and help investors make an informed decision to buy or sell this stock.

The company reported worldwide fourth-quarter revenue of $4.57 billion, compared to the $4.46 billion reported in the fourth quarter of fiscal year 2013, an increase of 3 percent on a constant currency basis after adjusting for a $39 million negative foreign currency impact or 2 percent as reported.

Including a onetime non-cash $746 million pretax certain litigation charge, primarily related to the company’s global patent agreement reached with Edwards Lifesciences Corp., as well as the company’s INFUSE product liability settlement, fourth-quarter net earnings as reported were $448 million, or 44 cents per diluted share, both decreasing 54 percent over the same period in the prior year. After adjustments, fourth-quarter net earnings and diluted earnings per share on a non-GAAP basis were $1.14 billion and $1.12, an increase of 1 percent and 2 percent, respectively, over the same period in the prior year.

The company reported fiscal year 2014 revenue of $17 billion, an increase of 4 percent on a constant currency basis after adjusting for a $175 million negative foreign currency impact, or 3 percent, as reported. As reported, fiscal year 2014 net earnings were $3.07 billion or $3.02 per diluted share, a decrease of 12 percent and 10 percent, respectively.

Non-GAAP net earnings and diluted earnings per share were $3.87 billion and $3.82, which is no year over year change and an increase of 2 percent, respectively. Fourth-quarter international revenue of $2.15 billion increased 5 percent on a constant currency basis, or 3 percent, as reported. International sales accounted for 47 percent of Medtronic’s worldwide revenue in the quarter. Emerging market revenue of $571 million increased 14 percent on a constant currency basis, or 10 percent, as reported, and represents 13 percent of company revenue.

Omar Ishrak, Medtronic’s chairman and chief executive officer, had this to say about the quarter: “In our fourth quarter, our overall organization once again delivered balanced growth, with strong performances in some areas more than offsetting challenges in other parts of our business. We remain focused on delivering consistent and dependable growth across all of our businesses through our three growth vectors: new therapies, emerging markets, and independent services and solutions.”

Looking ahead to 2015, Medtronic sees its revenue and diluted earnings per share guidance remaining strong. In fiscal year 2015, the company expects full-year revenue growth in the range of 3 to 5 percent on a constant currency basis and diluted earnings per share in the range of $4 to $4.10. Based on current exchange rates, the company indicated this would imply diluted earnings per share growth in the range of 6 to 9 percent on a constant currency basis.

In discussing the coming year, Ishrak said: “As we look ahead to fiscal year 2015, we remain focused on striving to reliably deliver on our baseline expectations. Furthermore, Medtronic intends to play a leading role in the transformations being undertaken in healthcare systems around the world. We are committed to deploying our technology, services, and people into partnerships with physicians, providers, payers, and governments to help them achieve their goals.”

He continued: “We are confident that we can play an integral role in helping them drive more value into their systems and ultimately, achieve better patient access and outcomes around the world. There are tremendous opportunities ahead as we transform Medtronic from being primarily a device provider today into the premier global medical technology solutions partner of tomorrow.”

On the whole, the quarter was very weak in comparison to the same quarter last year. However, this is due in part to Medtronic’s efforts to expand its business and its investment in research in development. International revenue is on the rise, and this will be where the company derives much of its future growth. As Medtronic looks to develop new therapies, investments will weigh on the bottom line, but this is to be expected for a cutting-edge healthcare technology company.

The company is transitioning from a device maker to one that offers a suite of technological solutions for its partners. This newfound shift in focus should drive revenues and, subsequently, Medtronic share prices higher in the coming quarters.

Disclosure: Christopher F. Davis holds no position in Medtronic. He has a moderate buy rating on the stock and a $68 price target.

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