A Member of Pat McKeough’s Inner Circle recently asked for his advice on Medtronic plc, a global medical device and equipment company.
Pat likes the firm’s positive long-term outlook and that an aging demographic will provide a growing market for its products. The company is also spending a significant 9% of sales on R&D and has low debt. On the other hand, Pat notes supply chain shortages and rising costs are an issue.
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MEDTRONIC PLC, (Symbol MDT on New York) develops, makes and distributes a wide range of healthcare-related devices and equipment. The company is the world’s largest medical device provider based on revenue.
Medtronic operates in 150 countries and employs over 95,000 people. For tax purposes, it makes its head office in Dublin, Ireland, but has its operational headquarters in Fridley, Minnesota.
On October 24, 2022, the company announced that it intends to set up its Patient Monitoring and Respiratory Interventions businesses as one independent, publicly traded company. The transaction will be on a tax-free basis to existing shareholders.
The two units account for $2.2 billion, or 7%, of Medtronic’s revenue. They have more than 8,000 employees globally.
The Patient Monitoring technology portfolio includes the Nellcor pulse oximetry and the BIS brain monitoring systems, while the Respiratory Interventions business comprises ventilators and breathing systems.
Inner Circle: Acquisitions may feature in future expansion plans for Medtronic plc
Medical device sales should keep rebounding as the pandemic subsides and patients go back to having elective procedures such as heart-related operations. As well, Medtronic’s new renal degeneration system device is intended to lower high blood pressure by disrupting signals between the kidneys and the brain; it is moving closer to winning approval from the U.S. Food and Drug Administration (FDA).
Medtronic’s $17.5 billion in long-term debt is a low 15% of its market cap. It also holds $8.9 billion in cash and investments.
The company operates in a global industry, competing against the likes of Johnson & Johnson, Philips Healthcare, GE Healthcare, and Siemens. However, Medtronic continues to defend its market leadership by investing in research and by acquiring innovative technology.
In fact, it spends about 9% of its sales on R&D. The company’s commitment to research has helped it continue to release innovative medical technology. For example, it leads in the development of micro-electronic, ultra-low-power medical devices. That includes a new type of pacemaker as small as a vitamin capsule.
Although the company held off on acquisitions over the past year or so, it has in the past acquired innovative technologies by purchasing other firms. Its most-recent purchases include Titan Spine, a titanium spine implant technology firm; AV Medical, a developer of medical interventions based on catheters; Stimgenics, a maker of a spinal cord stimulation used to treat chronic pain; and Digital Surgery, a surgical simulation, data, and analytics platform.
Medtronic’s long-term outlook is positive: the company’s ability to serve the needs of an aging population and an expanding middle class globally bodes well for its share price and investor returns. Technological changes that continually spur product development will also pay off for the company.
However, the company, like many medical device makers, will continue, at least in the near term, to face supply chain shortages and rising costs. The Ukraine conflict and any future COVID-19 lockdowns in China will also have an impact.
With the July 2022 payment, Medtronic raised its quarterly dividend by 7.9%, to $0.68 from $0.63. The stock now offers investors a 3.5% yield.
Recommendation in Pat’s Inner Circle: Medtronic plc is a hold.
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