3 Reasons Medtronic Inc.'s Stock Could Fall

Medtronic (NYSE: MDT  ) posted solid first-quarter earnings last month -- revenue climbed 5% year over year to $4.27 billion, while non-generally accepted accounting principles diluted earnings per share rose 6% to $0.93.

The medical-device maker reported 4% sales growth at its cardiac and vascular group, which accounts for over half of its top line. The restorative therapies group, which accounts for another 37% of sales, only rose 3% as a decline in the spine business offset growth in the neuromodulation and surgical businesses. The diabetes group, Medtronic's smallest business segment, grew 13% thanks to brisk sales of the MiniMed 530G, its first-generation "artificial pancreas."

MDT Chart

Source: YCharts.

Medtronic stock has remained flat since the earnings report, although it has outperformed the overall market to date in 2014.

While Medtronic's stock performance looks solid, investors should also understand the contrarian view to see why the share price might fall. But before we do so, note that while these points highlight Medtronic's vulnerabilities, they do not guarantee the stock will lose value.

Sluggish international growth
Last quarter, Medtronic's international revenue, which accounts for 45% of the company's top line, rose 3% year over year as reported, but only 2% on a constant currency basis. Comparing those results to growth in previous quarters, we can see that international growth is slowing as currency headwinds hurt Medtronic's top line.

Quarter

2Q 2014

3Q 2014

4Q 2014

1Q 2015

International rev. growth (reported)

3%

5%

4%

3%

International rev. growth (constant currency)

5%

7%

7%

2%

Source: Quarterly reports.

Medtronic notably struggled in China and India, which respectively posted 6% revenue growth and a 7% decline in the first quarter. During the post-earnings conference call, CEO Omar Ishrak attributed that weak growth to challenges in distribution channels and management changes in China, along with distributor terminations and inventory rebalancing in India.

Although Ishrak said he believes both regions will eventually return to double-digit growth, sluggish performance in India and China could throttle international growth for a few more quarters.

The Covidien acquisition could fail
There are two reasons Medtronic wants to acquire Dublin-based Covidien (NYSE: COV  ) for $42.9 billion -- to lower its corporate tax rate with an inversion and to horizontally expand its medical device business across emerging markets.

Merging with Covidien would create a business that generates $13 billion in foreign revenue annually, with $3.7 billion coming from emerging markets. The combined company would help Medtronic expand its footprint by reaching 150 countries worldwide.

Although that sounds great for Medtronic, the company still must clear several hurdles to complete the deal. In addition to opposition in Congress, the merger will likely undergo an antitrust review by the Federal Trade Commission. Moreover, a Covidien shareholder recently sued to block the planned sale, claiming the Irish company intentionally blocked competing bids that could have raised its value.

While it is expected to close by the end of the year, or in early 2015, investors should remember that the Covidien deal isn't guaranteed yet.

Looming competition in the diabetes business
Finally, Medtronic's strong growth in its diabetes group might not last much longer.

Last September, Medtronic made history with FDA approval of the MiniMed 530G, which connects an insulin pump to a continuous glucose meter, or CGM, to produce a wearable artificial pancreas. The pump halts insulin delivery when glucose levels drop below a preset threshold. Medtronic is following up the 530G with the 640G, a second-generation device that can predictively shut off insulin before low thresholds are met. Although Medtronic dominates the U.S. market for now, competitors are quickly closing in.

The Animas Vibe and Dexcom G4 Platinum System -- two devices that work together, one from Johnson & Johnson (NYSE: JNJ  ) and the other from DexCom -- are already approved in Europe, Australia, and Canada, and could be approved soon in the U.S. When that happens, Medtronic's double-digit growth in the diabetes business -- which has continued for three consecutive quarters -- could cool off.

The Foolish takeaway
Medtronic is a solid company with three core businesses that aren't likely to fade away anytime soon.

However, prospective investors should do their due diligence and carefully consider the company's strengths against key weaknesses like sluggish international growth, the fate of the Covidien deal, and looming competitors in the insulin pump and CGM markets, before they dive in.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their nondividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3088025, ~/Articles/ArticleHandler.aspx, 11/23/2014 4:34:59 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement