Just What the Doctor Ordered

09/04/2008 12:00 am EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, finds a strong medical stock without the baggage of Big Pharma.

One sector that is emerging as perhaps a new leadership group is health care. The market's volatility has increased the attractiveness of "defensive" groups such as health care, where earnings growth should continue despite a slowdown in the economy.

While I'm still concerned that certain pockets of health care, such as the large drug firms, will not be able to put up strong growth numbers, I'm more confident in the medical-technology sector and its ability to show growth.

One stock in this sector that looks especially attractive is Medtronic (NYSE: MDT). Medtronic is a world leader in medical-technology products. The firm's primary products help manage cardiac rhythm disease. The company also manufactures products used to treat spinal and cardiovascular ailments.

The company is coming off a solid fiscal first quarter in which sales and profits rose nicely. Medtronic's per-share earnings in its fiscal first quarter ended July 25th were up 16% on a 19% revenue jump. Revenue outside the US grew 24% to $1.45 billion. International revenue accounted for 39% of total revenues for the quarter.

Revenue from implantable cardioverter defibrillators rose more than 5% in the quarter. Revenue from cardiovascular products rose 30%. Cardiovascular sales were aided by the company's drug-eluting stent product. This business should continue to be a major driver of revenue growth.

Spinal sales rose 33%. Sales here were aided by the acquisition of Kyphon. (Without Kyphon, spinal sales rose 8%.) Medtronic is expected to earn $3.00 per share in fiscal 2009 ending in April, up from $2.60 in fiscal 2008.

The stock is currently trading at 18x the fiscal 2009 estimate [of $3.00 per share], a relatively moderate P/E ratio for this stock based on its historical multiples. Reflecting the company's confidence in its future and its willingness to share cash flows with shareholders, the firm recently boosted its dividend 50% to a quarterly rate of $0.1875 per share, payable October 24, 2008. The indicated yield based on the new dividend is 1.3%.

The stock is trading [at around $55]. I would expect these shares to push past $60 before the year end and to outperform the overall market in 2009. Medtronic traded for nearly $61 per share in 2001, and that level has been a cap on the stock in the last seven years. However, a strong breakout above $61 would generate a new, higher trading range for these shares.

Medtronic offers a direct-purchase plan whereby any investor may buy shares directly.  Minimum initial investment in the plan is $250.

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