Tickers in this Article: MDT, BSX, STJ, JNJ
Bargains are getting harder and harder to find in the med-tech sector these days, and with Medtronic (NYSE:MDT) sporting a double-digit EV/EBITDA ratio and a 35% gain in the share price over the last year, it doesn't necessarily jump out as a bargain. Nevertheless, with signs of stabilization evident in CRM and spine and some high profile products coming out in a couple of years, Medtronic is still worth considering even at this 52-week high.

Fiscal Q4 Results Look Better Than They Are
Investors liked what they saw in Medtronic's fourth quarter earnings release, but I'm not sure the results are so good on further examination. Although Medtronic technically beat on a bottom line EPS basis, the quality of that beat was rather low.

Revenue rose 4% as reported this quarter, or 5% on an organic basis. That was good for almost a 2% beat relative to expectations, and that's not bad for this sector. The company's CRM business saw 4% organic revenue growth and spine was flat, both of which were better than expected. The rest of the businesses were more or less on target, as cardiovascular was up almost 7%, neuromodulation was up 7%, diabetes was up 4%, and surgical tech was up 11%.

Medtronic was not nearly as impressive on the margin side. Gross margin not only fell a point from the year-ago level, but missed the average estimate by almost a point as well. Operating income rose 3%, but here too the company missed the average estimate on margins by almost a point. All told, these margins disappointments more than compensated for the revenue beat, and Medtronic reported a one-cent miss on an operating basis (with “below the items” compensating).

SEE: How To Decode A Company’s Earnings Reports

Stabilization And Share Gains, But Abundant Growth Still Lacking
Medtronic's performance in CRM was a good news/bad news sort of proposition. Medtronic definitely outperformed Boston Scientific (NYSE:BSX) and St. Jude Medical (NYSE:STJ) and continued to gain share, but the underlying market is still pretty sluggish.

The story in spine likewise had a somewhat bitter aftertaste. This business seems to be stabilizing, but the performance of the overall market is still pretty uninspiring. Medtronic seems to have stemmed its market share losses, but I'm not sure the company has entirely answered the questions as to whether it can regain momentum against rivals like Johnson & Johnson (NYSE:JNJ) and NuVasive (Nasdaq:NUVA).

The picture is brighter in markets like heart valves, stents, and diabetes, but there are certainly risks here as well. I will argue that Medtronic has proven to be a more formidable competitor to Edwards LifeSciences (NYSE:EW) in transcatheter valves than expected, but St. Jude and Boston Scientific are both on the way with their own valves. In stents, business is slowing as Medtronic passes the anniversary of a big product launch, and in diabetes there are increasing fears regarding reimbursement.

SEE: A Checklist For Successful Medical Technology Investment

New Products On The Way … But Not Right Away
While Medtronic management confirmed existing expectations for fiscal 2014 financial guidance, this next year may be a little lacking in dynamic events. While a new MiniMed insulin pump is due to hit the market, there's not much else to thrill investors – leaving the stock more dependent on underlying market growth recoveries, ongoing share gains, and/or margin improvements.

Fiscal 2015 should be more exciting. That is when the company is expected to launch the CoreValve (the transcatheter valve) in the U.S., the Symplicity renal denervation system, and the Admiral drug-eluting balloon system. The first two products address markets that could be worth $2 billion or more a year, and the drug-eluting balloon could significantly improve the company's standing in peripheral treatments compared to Boston Scientific, Covidien (NYSE:COV), and Bard (NYSE:BCR).

SEE: Can Earnings Guidance Accurately Predict The Future?

The Bottom Line
Most of my favorite names in med-tech are “fairly valued” or worse right now, and that includes names like Stryker (NYSE:SYK), Covidien, St. Jude, and Becton Dickinson (NYSE:BDX). That largely leaves investors having to either accept less exciting expected returns or take their chances with “cheap for a reason” stocks.

Medtronic is perhaps still an exception. I expect 3% long-term revenue growth here and similar growth in free cash flow (FCF), which is a little higher than where most sell-side analysts appear to be. That works out to a fair value of about $57.50, roughly 10% below the price as of this writing. That passes for a good deal these days and I think investors can still buy Medtronic with the expectation of outdoing the market and the sector.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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