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Medtronic's Diabetes Arm Grows Strong, Rising Costs Ail

Zacks Equity Research

On Apr 1, we issued an updated research report on Medtronic plc MDT. While we are encouraged by the company's globally accepted advanced therapies, its escalating costs and expenses, however, raise concerns. The stock has a Zacks Rank #3 (Hold).

Medtronic delivered better-than-expected earnings in third-quarter fiscal 2019. All major business groups contributed to solid top-line growth at CER, highlighting sustainability across groups and regions in addition to displaying a successful achievement of the synergy targets. We are encouraged by the company's strong growth trend in the United States after adjusting for its divestitures as well as the healthy global acceptance of its advanced therapies.

This apart, the company has been seeing certain favorable developments in its Diabetes business. Medtronic is highly positive about its foray into the $1-billion standalone CGM (Continuous Glucose Monitoring) market with its Guardian Connect.

Medtronic PLC Price

Medtronic PLC Price | Medtronic PLC Quote

Meanwhile, we are optimistic about the recently-closed acquisition of Mazor Robotics, which is expected to fortify Medtronic's position in the spine surgery space. Following the completion of this transaction, the company launched the Mazor X Stealth Edition of robotics guidance platform in January and already received a favorable feedback for this combination of best-in-class robotics and navigation capability.

Also, the gradually stabilizing Cardiac Rhythm & Heart Failure (CRHF) market holds a lot of promise. Although in the reported quarter, the company incurred a year-over-year loss in this business, there was mid-single-digit growth in pacemakers, banking on the strength of Micra transcatheter pacing system and the Azure wireless pacemaker.

We are currently hopeful about the company's newly-launched restructuring initiative called Enterprise Excellence plan, aimed at $3-billion annual growth run rate savings by the end of fiscal 2022. Per the company, this new program has been designed to increase its effectiveness and enabled reinvestment for growth along with driving a consistent margin expansion and EPS leverage.

On the flip side, the company has been grappling with steep costs and expenses, weighing heavily on its bottom line.

Over the past six months, shares of Medtronic have underperformed the industry. The stock has lost 6.9% compared with its industry's 1.6% decline.

Key Picks

Some better-ranked stocks in the broader medical space are Stryker Corporation SYK, Penumbra, Inc., PEN and Varian Medical Systems, Inc VAR, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stryker’s long-term earnings growth rate is expected to be 10%

Penumbra’s long-term earnings growth rate is forecast at 20.9%.

Varian’s long-term earnings growth rate is projected to be 8%.

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