Topic: How To Invest

Medical implant maker aims for growth from acquisitions

Medtronics' Revo MRI® SureScan® Pacing System image

Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

As the population ages, many consider medical and biotech firms to be a promising stock market investment. This past week, an Inner Circle member asked Pat about one of the giants in the field, the world’s biggest maker of implantable biomedical devices.

Q: Pat: Can you give me your recommendation on Medtronic, the maker of medical devices? Thank you.

A: Medtronic Inc., (symbol MDT on New York; is the world’s largest maker of implantable biomedical devices. The company sells its products in over 120 countries. Markets outside the U.S. account for 45% of its sales.

Medtronic gets 48% of its sales by making and selling neurological, spinal, ENT (ear, nose and throat) and diabetes products. It also makes devices that help manage heart rhythm (31% of sales) and cardiovascular products, such as heart valves and stents (21% of sales).

In its 2012 fiscal year, which ended April 27, 2012, Medtronic’s sales rose 4.4%, to $16.2 billion from $15.5 billion in fiscal 2011. Earnings rose 11.8%, to $3.4 billion from $3.1 billion. The company spent $1.4 billion on share buybacks in fiscal 2012. Because of fewer shares outstanding, earnings per share rose 14.2%, to $3.22 from $2.87.

If you exclude unusual items, such as costs to integrate recent acquisitions and a gain on the sale of a business, earnings per share would have risen 2.7%, to $3.46 from $3.37.

In fiscal 2012, the company spent 9.2% of its sales on research. This spending has resulted in several successful products in the past few months. For example, Medtronic’s new Valiant stent helps repair aneurysms and ulcers, and is less invasive than competing stents. Medtronic also launched the Powerease system, a group of instruments that speeds up certain spinal surgeries.

The company is also improving its product lineup by purchasing other medical device makers. In August 2011, it paid $452 million for the 91.1% of Salient Surgical Technologies Inc. that it did not already own. Salient makes tools for spinal and abdominal surgeries, as well as other procedures.

Medtronic also paid $96 million to raise its stake in Peak Surgical Inc. to 100% from 81.1%. Peak makes instruments for dissecting tissue.

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Medtronic settles lawsuit and avoids federal charges over bone graft treatment

Medtronic’s strong balance sheet will let it continue to invest in new products and make acquisitions. Its long-term debt of $7.4 billion is a moderate 19% of its market cap. It also holds cash of $2.6 billion, or $2.50 a share.

Most of the company’s products are selling well, but demand for its rhythm-management products, such as defibrillators, has been weak.

The stock fell from $43 in May 2011 to $30 in August 2011 over concerns about the safety and effectiveness of the company’s InFuse bone graft treatment, which contains a genetically engineered protein to stimulate bone growth. Medtronic recently paid $85 million to settle a class-action lawsuit related to InFuse. In May 2012, federal officials closed their investigation of the company without laying charges.

Medtronic trades at 10.7 times the $3.66 a share that it is likely to earn in its 2013 fiscal year. The stock yields 2.7%.

In the most recent Inner Circle Q&A, Pat looks at how the decision of many Americans to put off surgical procedures due to high unemployment and lack of medical insurance is affecting Medtronic. He also considers whether increased sales in countries like India and Brazil can help offset weakened demand in the United States. He concludes with his clear buy-hold-sell advice on the stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow members

Many believe that the demands of an aging population in North America make medical stocks a good buy. Have you picked up on this trend by investing in medical stocks? With so many medical stocks being American, how did you make your selection? Are you pleased with the results so far? Let us know what you think in the comments section below. Click here.


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