This Medical Name's Vitals Are Improving

07/10/2012 8:15 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

Powerful demographic trends—the graying of America and other developed nations—and strong strategic niches mean this medical device maker's prognosis is looking up, notes Pat McKeough of TSI Network.

Medtronic (MDT) is the world’s largest maker of implantable biomedical devices. The company sells its products in over 120 countries. Markets outside the US 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, 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 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.

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%.

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