Medtronic Beats Estimates
Medtronic (MDT) reported its fiscal fourth quarter (ended April 25) results prior to trading Tuesday morning. The medical device company reported flat net income from results a year ago that were aided by a tax gain. However, revenues rose by more than 18%, thanks in large part to the introduction of the Endeavor drug-dispensing stent. The company is also benefiting from the acquisition of Kyphon, which has added value to the spinal segment of the business. The company earned 72 cents per share compared to 70 last year, and without the acquisition and restructuring charges the results would have improved to 78 cents per share in the quarter. The company projected fiscal 2009 
earnings to be $2.94 to $3.02, and revenues of $15 - $15.5 billion.
The early success of Endeavor is a very positive sign for a company that has been fully engaged with restructuring and cost cutting struggles. The successful launch of Endeavor has boosted sales for the cardiovascular business unit by 22% and Medtronic now has more than 20% market share in that industry segment . The cardiac-rhythm-disease management segment–the company’s largest business–experienced a revenue increase of 5.6%. Earlier in May, Medtronic stated that it will reduce headcount by 2.8% in low growth segments of the business but the job cuts will be partially offset by hiring in higher growth segments. Also, just last week the company made public the departure of Chief Operating Officer Michael F. DeMane.
Currently, our research is positive on the long-term prospects for Medtronic. The stock is up about 2% since the announcement but it is still selling at an attractive price level. The current price-to-cash flow is a full 42% below the average of its historic norm. Likewise, price-to-sales is 39% below where we would expect it to be. The successful launch of Endeavor should continue the positive trend of healthy sales growth. Given these factors—in order for MDT to trade within what we consider normal ranges—the stock would need to trade in the range of $69 - $81. The headache’s caused by recent cost cutting and restructuring should be coming to a close. Thus, we think there is sufficient reason for long- term investors to look closely at Medtronic.
Ockham Research Staff @ May 20, 2008