These are challenging times for even the best medical technology companies. Insurance companies, hospitals and national governments are pushing back hard on pricing, patient visits are down, and innovation seems stifled between modest clinical progress and a considerably more conservative FDA. Not surprisingly, then, Medtronic (NYSE:MDT) is delivering much less growth than long-term investors are accustomed to, and the near-term outlook is not looking especially strong.

The real question, though, is whether Medtronic can pull out of this rut. Even just a bit more growth at the top line would make this stock a value, but stagnant markets and the turmoil of the transition to a new CEO could keep a lid on the shares in the near term.

A Weak End to the Fiscal Year
Analysts were not expecting a great fiscal fourth quarter, but Medtronic's results were weak nonetheless. Reported revenue was flat on a constant currency basis, though adjusting for the extra week in the year-ago quarter would have bumped the growth rate to 2%. As this quarter shows, foreign sales are becoming increasingly important to Medtronic's growth. Foreign sales were up 7% (constant currency) to just under $2 billion, with emerging market growth coming in at 20%.

The company's largest business, cardiac rhythm management, did not impress. Sales were down 9% overall, led by an especially weak 14% decline in U.S. ICD (implantable cardiac defibrillator) sales. Even granting that CRM sales are not great across the industry, Medtronic does seem to be paying for its decision to stop doing business with Novation, a major purchasing organization. St. Jude (NYSE:STJ) quickly picked up where Medtronic left off, and it stands to reason that Novation would be direct CRM business toward St. Jude products. (For more, see Can St. Jude Live Up To Newfound Expectations?)

Spine was also an area of weakness, as sales dropped 2%. Here, too, is a case of a weak overall industry. While a few companies like Nuvasive (Nasdaq:NUVA), Biomet, Orthofix (Nasdaq:OFIX) and Johnson & Johnson (NYSE:JNJ) are showing relatively better performance, the market as a whole is weak right now.

In contrast, Medtronic did see some strength in stents - a market where Abbott (NYSE:ABT) still does pretty well - and diabetes. Unfortunately, the company is not doing so well overall with its profitability. Gross margin slipped about 80 basis points, and adjusted operating income fell about 8% from last year.

Where Does The Company Go From Here?
On one hand, it seems easy to argue that Medtronic will snap back once the economy gets a little better and patients go back to seeing their doctor. That may be true, but it seems much less likely that insurance companies and hospitals will ease up on pricing.

It is also worth pondering whether Medtronic can still wring enough growth out of its core businesses. It's true that the American population continues to age, but it is also true that doctors have started to pull back from implanting ICDs as enthusiastically as before. Elsewhere, competitive moves (like the merger of JNJ and Synthes) will present new pressures in markets like spine care. (For more, see JNJ and Synthes: A Good Deal With Some Questions.)

The Bottom Line
Investors who think that Medtronic cannot grow anymore would be well advised to remember that markets like drug-coated stents, transcatheter valves, neuromodulation, continuous glucose monitoring and kyphoplasty hardly existed 10 years ago. Spending over $1.5 billion a year in R&D gives Medtronic a better-than-average chance of being a player in many of the next-generation markets - markets that may only exist in the minds of engineers and surgeons today.

That said, hope of better growth should never be more than a part of an investment thesis. Looking at the real numbers, Medtronic's shares do not seem to be incorporating much in the way of future growth expectations. As long as Medtronic can tread water and grow with average procedure counts, and hold the line of free cash flow conversion, the shares seem worth a look for patient value investors. (For more, see A Checklist For Successful Medical Technology Investment.)

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