On Dec 7, 2015, we issued an updated research report on Medtronic plc MDT. The combined company (post the legacy Medtronic-Covidien merger) handily outpaced the Zacks Consensus Estimate of both earnings and revenues in the second quarter of fiscal 2016. The consolidated company demonstrated strong segmental performances reflecting successful integration and achievement of synergy targets.
According to Medtronic, the Covidien integration is on track, and is meaningfully accelerating all three fundamental growth strategies of Medtronic – therapy innovation, globalization and economic value.
The company is already drawing benefits from its first and highest priority ‘preserve’, as evident from the continued revenue growth across all business groups and geographies. Under the priority ‘optimize’, Medtronic is on track for achieving the expected minimum of $850 million in cost synergies by the end of fiscal 2018. The company is currently working on its fiscal 2016 value capture initiative target, which entails expected savings of $300 million to $350 million by the end of the current fiscal.
The combined company should generate significant free cash flow, a substantial percentage of which will be deployed with much greater flexibility. This cash flow will ensure better investment in U.S. healthcare technologies as well as enhanced shareholder returns.
Medtronic is resorting to all possible means to boost growth. This includes penetration in emerging markets, expansion of its portfolio and restructuring of initiatives. These should benefit the company over the long term. We are also encouraged by Medtronic’s recent foray into the rapid growing transcatheter mitral valve replacement (TMVR) market through its recently completed $458 million acquisition of California-based medical device start-up firm – Twelve, Inc.
However, on the tepid side, the company is currently entangled in multiple legal issues, which are proving to be a pressure on the bottom line. Moreover, headwinds like currency fluctuations, soft economy and tough competition keep us on the sidelines.
Key Picks in the Sector
At the moment, Medtronic retains a Zacks Rank #3 (Hold). Some medical product stocks worth a look are ICU Medical, Inc. ICUI, INSYS Therapeutics, Inc. INSY and LeMaitre Vascular, Inc. LMAT. All three stocks sport a Zacks Rank #1 (Strong Buy).
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