Medtronic: Pacemakers to Surgical Robots

06/28/2019 5:00 am EST

Focus: HEALTHCARE

Adam Mayers

Editor, The Internet Wealth Builder and The Income Investor

Medtronic (MDT) was founded in Minneapolis in 1949 as a medical equipment repair company. It is now the world’s largest medical device company, headquartered for tax reasons in Dublin, explains Adam Mayers, editor of Adam Mayers Investing.

It gets 60% of its sales and profits outside the U.S. and employs 86,000 people in 140 countries. More than 10% of its employees are research scientists, which ensures a steady stream of new products.

Medtronic operates in four segments. Cardiac and Vascular makes heart management devices, including pacemakers and defibrillators (38% of sales). The Minimally Invasive Therapies group makes stapling and wound closure products as well as devices for imaging and neurological problems (29%).

Restorative Therapies makes robots, implants, and tools for conditions relating to the musculoskeletal system and brain (26%). The Diabetes group makes insulin pumps and other consumables (7%).

Medtronic shares hit a record of $100.15 in September 2018 and then retreated during the year-end market sell-off. They bottomed out in April at $84 and have recovered since. Year-to-date the shares are up 3.79%.

On May 23, Medtronic reported its 2019 fiscal year-end. Performance beat expectations. Annual revenues were $30.56 billion, up 5.5% on an organic basis. Net earnings were $4.63 billion or $3.41 per diluted share.

In the fourth quarter, U.S. sales rose 2.3% year-over-year, while other developed markets rose 1.7% when using a constant exchange rate (CER).  Emerging market revenues, which are now 16% of the total, rose 12% when using a CER.

The fourth quarter performance was led by the Restorative Therapies group, which includes its surgical robots. IBM Watson Health and Medtronic worked together to create a mobile app to help track patient data and better manage diabetes. Credit: Medtronic

In May, Medtronic announced a deal to buy Titan Spine Inc., a privately held Wisconsin company that makes a line of titanium implants for spinal surgery.

The implants are spacers that are inserted between the vertebrae during spinal fusion surgery to relieve pressure on nerves and hold the vertebrae in place. The purchase complements its earlier acquisition of Mazor.

Medtronic is a dividend aristocrat, having increased its payment for 41 years in a row through 2018. The last increase was in April 2018. The $2 annual rate yields 2.15% at current prices.

Medtronic has a market capitalization of $124.7 billion and a trailing 12 months p/e ratio of 17.74, which is below most of its peers. It continues to grow organically and its investment in R&D through its scientific staff is a hidden asset.

The trends of first world aging and emerging market growth will continue with the former needing more procedures and the latter able to afford more. Medtronic is poised to profit from these tailwinds, offering investors rising dividends, safety and growth.

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