While Markets Waffle, Medtronic Hits New Highs

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NEW YORK (TheStreet) -- No stock keeps hitting new 52-week highs without taking a bit of a pause. The past several weeks haven't seen many new 52-week highs, but the company I'm spotlighting has had more than one.

In the past I've referred to Medtronic as the "Rodney Dangerfield" of medical products companies. For a long period its stock and the value of the company couldn't get any respect.

That moniker has changed lately, but this is a company that knows how to be patient about its reputation and its business results. Founded in 1949, Medtronic has grown to become the world's largest independent medical technology company.

It's self-stated "mission" is to "...alleviate pain, restore health and extend life," and that's a mission to which everyone can relate. In fact its mission hasn't changed since its co-founder, Earl Bakken, wrote it in 1960: "To contribute to human welfare by application of biomedical engineering in the research, design, manufacture, and sale of instruments or appliances that alleviate pain, restore health and extend life."

MDT claims that more than seven million lives are enhanced every year by a Medtronic product or therapy, or one every four seconds. The Minneapolis company operates in more than 120 countries, employs 45,000 people (including 9,000 scientists) and has pursued research and innovation that's led to more than 23,000 patents.

It's difficult to put a value on those 23,000 patents, but MDT's market cap of around $53 billion probably isn't high enough. That's part of the reason why, on June 14, shares reached a 52-week high of $53.30. Then, on Monday, they hit another high of $53.80. Wednesday's closing price was $52.05.

The medical technology and medical device sector has been doing well during 2013 so a "time-out" resulting from the Federal Reserve's Open Market Committee statements and interpretations wasn't unexpected. Yet, this pull-back has little to do with MDT's future or its latest news.

The scale and scope of MDT's products and technologies are as impressive as its eye-pleasing Web site. You owe it to yourself to browse through the Web site, especially its investor relations section.

Since a picture paints a thousand words let's look at this five-year chart of the price history of MDT shares.

MDT Chart
MDT data by YCharts

The stock's price is moving up to levels we haven't seen since before the Great Recession and the Financial Fiasco that began in late 2008. The stock price has been propelled of late by the improving trailing 12-month (TTM) operating and profit margins.

As of April 26, MDT had a 29% operating margin and a 21% profit margin (TTM). Its operating cash flow of $4.88 billion and its net income available to common (TTM) of $3.47 billion allowed for a dividend per share of $1.04. This is a yield to price currently of around 2% and represents a payout ratio of only 31%.

Analysts' consensus estimate for quarterly earnings results call for a modest increase in EPS of only 3.5% and an even smaller 2.7% improvement in revenue and sales growth. If that's the case, why are the shares doing so well?

One reason is the stock, even at $53 a share, is selling at a forward (one-year) PE ratio of around 12. As a comparison, competitor Johnson & Johnson's forward PE is almost 15. One advantage JNJ shareholders have is a more generous dividend yield currently around 3.11%.

So perhaps the market is pricing in the possibility of an increase in the dividend payout for Medtronic shares. The chance of beating on earnings and revenue may also be a reason for MDT's rally. News of late has been mainly positive but not exactly what MDT had hoped.

As an example, two independent studies including one at Yale University that the company helped to fund determined that MDT's bone-growth product, the Infuse bone graft, was no better than a traditional spinal surgery.

The details of the news release and its findings are worth careful consideration. The Medtronic group president responsible for the Infuse unit, Chris O'Connell, put a positive spin on the outcome of the two independent studies.

He said the studies underscore what MDT has always believed, that "Infuse is an important option for many patients." More than a million patients have used the products, according to O'Connell. He indicated the company would continue to seek U.S. Food and Drug Administrative approval to market it for other uses.

Until more positive news or shareholder-friendly announcements are made, I'm beginning to believe that shares of MDT may have peaked for the time being. From a technical perspective the 50-day moving average price doesn't come into play until shares fall below $50 to around $49.60.

Investors and traders might be wise to wait to see if MDT is able to hold above that level before becoming buyers. If shares were to close below the 50-day average the next support is the 100-day moving average, which is below $48 per share.

At least MDT is getting the respect it deserves and its 23,000 patents aren't being treated like chopped liver any longer. Put this innovative company on your watch list and patiently wait for a good entry point.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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