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The JPMorgan Healthcare Conference just finished up in San Francisco and was arguably the most important event of the entire year for the health care sector. This is one of the rarest opportunities for biotechnology, pharmaceutical, and medical device companies to open up about where they've been and where they're headed, so it pays to take notice.
With dozens of companies presenting each day last week, it was veritably impossible to review each and every one. That doesn't mean, however, that there weren't other companies squarely in my sights.
Medical device behemoth Medtronic (NYSE: MDT ) was a company I had my sights on early last week, unfortunately I lack the eight arms needed to simultaneously write about every company I wanted to cover. In particular, I was curious of what, if anything, Medtronic would have to say with regard to the medical device excise tax and if it would be focusing more on overseas growth because of it. We've already witnessed both Boston Scientific (NYSE: BSX ) and Stryker (NYSE: SYK ) either moving some of their operations abroad or cutting their workforce in direct response to the Affordable Care Act, so this was a key speech for me to catch.
Needless to say, Medtronic CEO Omar Ishrak is my kind of person -- straight to the point and perfectly willing to offer up statistical and visual projections that you can wrap your hands around!
Ishrak began by laying out Medtronic's short-term growth rate expectations and expansion plans. He noted that one driver is simply the fact that its U.S. business is stabilizing. But, the real growth driver over the next few years that Ishrak focused on was new product -- such as Resolute Integrity, the company's next-generation drug-eluting stent -- and a push into emerging markets. Peers Zimmer Holdings (UNKNOWN: ZMH.DL ) and St. Jude Medical (NYSE: STJ ) are both relying on double-digit growth in emerging markets to propel their earnings, and it appears Medtronic will do the same.
Ishrak is targeting emerging market growth of 20% and plans to bring the total revenue generated by third-world companies up to 20% within the next few years by focusing on a "premium" versus "value" model. According to Ishrak, emerging markets that are capable of affording Medtronic's devices only bear market penetration of 8%, largely due to a lack of awareness and physician training, as compared to developed markets with 22% market penetration. This premium market represents a big growth opportunity for Medtronic. Similarly, emerging market countries unable to afford Medtronic's products, known as "value" regions, will benefit from low-cost innovations. Most importantly, Ishrak opined that margins should stay consistent across all regions -- developed and emerging markets!
Another big factor discussed was where Medtronic is headed with regard to new areas of focus (not just regions) and with its cash. First, to quell you dividend lovers out there, Medtronic has the intention of returning about $12.5 billion in dividends to investors over the next five years. This means you can probably expect a continuation of the current streak of 35 consecutive annual dividend increases.
In terms of focus, Medtronic is shifting its interests to three primary areas: cardiovascular, neuro and orthopedics, and diabetes. This is really where Medtronic's insanely strong cash flow and huge portfolio come into play because it allows the company to enter into countless regions and hit a variety of price points.
Overall, Medtronic expects to target mid-single-digit growth (projections are for 6%-7% in 2013) with EPS growth outpacing revenue by 100 to 200 basis points as it focuses on cost-cutting projects as well. Given its impressive dividend and product portfolio, broadening exposure to emerging markets, and the openness of its CEO to divulge his company's growth plans, I continue to see why I chose Medtronic as a great dividend company you can buy right now a year ago.
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