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Balanced View on Medtronic

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On Mar 13, 2014, we issued an updated research report on Medtronic, Inc. (MDT). While we are, to some extent, relieved with signs of stability following improvement in Medtronic’s core implantable cardioverter defibrillator (:ICD), challenges still loom large in the spine market which remains sluggish. The stock currently carries a Zacks Rank #3 (Hold).

Medtronic posted a mixed third-quarter fiscal 2014 with adjusted earnings per share of 91 cents, down 2% year over year and in line with the Zacks Consensus Estimate. Revenues came in at $4.163 billion, up 4% at CER, closely beating the Zacks Consensus Estimate of $4.155 billion.

We are encouraged by the improvement observed in Medtronic’s core Cardiac Rhythm Disease Management (CRDMF) segment. In the third quarter, ICD revenue growth was 1% at CER compared to low single-digit market growth rate (both in the global and U.S. ICD markets). With 50 basis points (bps) gain in international share and loss of 50 bps in U.S. share, global ICD share remained stable during the quarter.

The company also witnessed robust growth in the transcatheter valve business in the international market on the back of CoreValve. In Jan 2014, Medtronic received the earlier-than-expected FDA approval for its self-expanding transcatheter, CoreValve System for three different access routes -- transfemoral, subclavian, and direct aortic -- in extreme risk patients. We expect this to further strengthen the company’s business in this niche by providing greater competitive advantage.

Medtronic is resorting to all possible means to boost growth. This includes penetration into the emerging markets, expansion of portfolio and restructuring of initiatives, which should benefit the company over the long term.

However, on the tepid side, the company’s pacing segments posted disappointing sales. Also, Spine revenues still maintain a sluggish trend. Margin pressure too poses a major cause of worry. Moreover, headwinds such as unfavorable currency movement and global economic uncertainties persist.

Although, in March this year, the European Patent Office (:EPO) had invalidated, in its entirety, the Edwards Lifesciences Corp.’s (EW) EP2055266 Spenser patent; the earlier injunction against CoreValve had already impacted Medtronic’s sales in the region.

Key Picks in the Sector

While we prefer to remain on the sidelines regarding Medtronic at present, some better-ranked medical stocks worth a look include Covidien plc (COV) and Stryker Corp. (SYK). Both the stocks hold a Zacks Rank #2 (Buy).

Read the Full Research Report on MDT
Read the Full Research Report on SYK
Read the Full Research Report on COV
Read the Full Research Report on EW

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