These aren't the glory days for med-tech giant Medtronic (NYSE:MDT), as fiscal 2014 will be a pretty weak year from a growth perspective ahead of some significant new product launches in 2015. Even with a high-quality name like Medtronic, that lack of growth can lead to shares languishing as investors are attracted to (or distracted by) more impressive-looking stories in the short term. Although I'm not a passionate bull on Medtronic shares by any stretch, the stock is pretty much what passes for a bargain these days in the larger segment of this industry and I think it's a respectable core holding.
Quarterly Results Pretty “Meh” For Medtronic
There wasn't a lot to complain about in Medtronic's fiscal first quarter, but then neither was there much to celebrate. Like many others in this sector, it was a workmanlike quarter for a market still weighed down by adverse pricing, reimbursement, and utilization trends.
SEE: A Checklist For Successful Medical Technology Investment
Revenue rose 2% as reported, or about 3% on an organic basis – very slightly below the average of sell-side estimates. Margins were likewise okay-ish. Gross margin was down about 70bp from last year and either 10bp or 50bp below the average (I've seen two different “consensus” figures). Likewise, operating income rose 3% and operating margin expanded slightly (40bp), but that was either just barely above expectation, or a bit below where sell-side numbers were.
If there was one bright spot to the quarter, it was in the international business. Medtronic's international sales rose 15% on a constant currency basis this quarter.
Segment Results Mixed As Well
Not unlike the overall results, Medtronic's line-item results were mixed this quarter.
Overall cardiac rhythm management (CRM) sales were up about 2%, or just slightly below expectations. While pacemaker sales were stronger than expected (up 6%), analysts stubbornly refuse to accept that St. Jude (NYSE:STJ) and Boston Scientific (NYSE:BSX) are doing alright in ICDs and I think the company's “weak” performance (down 2%, but 3% below expectations) has less to do with the business than those expectations. On a brighter note, atrial fibrilation-related sales were up 22%.
Spine was weaker than expected (down 1%), as the company continues to suffer from its problems with the orthobiologic Infuse. Excluding Infuse, Medtronic isn't doing terribly relative to Johnson & Johnson (NYSE:JNJ) or Stryker (NYSE:SYK), but given that biologics are a large part of most spine care businesses, I wouldn't agree that you should exclude it.
Cardio was solid, up 6% and 5% ahead of expectations, as CoreValve continues to do well and the stent business is alright. Neuro and diabetes were more mixed – not bad relative to expectations, but not great in absolute terms (up 3% and 1%, respectively), as the new Boston Scientific Precision Spectra gained some traction and the diabetes business suffered from deferrals ahead of the new 530G pump.
One bright spot was the Surgical Tech business – up 13% and well ahead (more than 10%) of expectations. With the sluggishness in diabetes, Surg Tech could move Diabetes down to the smallest reported segment momentarily (though I expect the 530G pump to ultimately revive sales).
Holding Its Own For Now
All things considered, this is a good enough result for Medtronic. The company is certainly suffering from the launch of new products from rivals and the erosion of the Infuse business, but none of those were (or should have been) unexpected developments. Moreover, I do believe that the company can gain strong initial share with its Simplicity renal denervation product in 2015, as well as the Admiral drug-eluting balloon. I'm a little less certain about the CoreValve launch in the U.S., given Edwards' (NYSE:EW) disappointing U.S. sales, but I still believe it will be a significant product that moves the needle on revenue growth.
SEE: Compound Annual Growth Rate: What You Should Know
The Bottom Line
Medtronic has a trailing free cash flow CAGR of 7%, but I'm forecasting less than half that growth rate for the next decade, as the company faces more challenging headwinds from reimbursement, competition, and its own size. Even so, a 3% free cash flow growth rate supports a fair value in range of the high $50s to low $60s, and that appreciation potential isn't too bad for the sector these days. Factor in the company's commitment to establishing itself as a player in emerging markets, and I think you can make a decent enough case for buying Medtronic shares today.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.
InsuranceFind an investment that will give your portfolio a shot in the arm.
Stock AnalysisThese three stocks are resilient, fundamentally sound and also pay generous dividends.
Investing NewsAre stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
Investing NewsHere are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
Investing NewsHere are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
Stock AnalysisIf you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
Mutual Funds & ETFsExplore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
Mutual Funds & ETFsLearn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
Investing NewsWill Ferrari's shares move fast off the line only to sputter later?
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>