After starting 2006 trading near $60, shares of medical-equipment firm Medtronic (NYSE:MDT) had fallen to less than $43 during August's overall market malaise. The stock is up more than 8% today to $53.07, after the market liked second-quarter results. Should Fools get ready for further gains?

While second-quarter sales and earnings were decent, the fact that they came in ahead of analyst projections explains today's jump in the stock price. Further details can be found in our recent Fool by Numbers, but in a nutshell, total sales grew 11.2%. Although reported earnings fell just less than 12%, when adjusting for stock option expenses and some other gains last year, the company detailed that earnings actually grew 13%.

I've had my eye on Medtronic, the undisputed leader in medical devices, for a while now. Its market capitalization of $61.4 billion towers over the pure-play competition. BostonScientific (NYSE:BSX) is now more than $24 billion, hampered by Guidant-integration difficulties, while St. Jude (NYSE:STJ) is smaller still at $13.4 billion. Health-care giant Johnson & Johnson (NYSE:JNJ) has a sizeable device business, but also operates in the pharmaceutical space.

Medtronic dominates the cardiac device market, with 50%-plus market share in the pacemakers and defibrillators that keep the heart pumping properly. St. Jude and Boston Scientific hold only 20%-30% of each category. Medtronic is also a very consistent grower, with sales and earnings growing in the double digits for as long as I can remember. Demographic trends are in the industry's favor, since aging baby boomers will undoubtedly require more medical services to stay healthy.

That said, the market is no slam dunk. It's intensely competitive, subject to high levels of government and FDA scrutiny, and dependent on technological breakthroughs to keep growth humming along. To illustrate, drug-eluting stents have only been around since 2003, catapulting Johnson & Johnson and Boston Scientific to market leadership with nearly half of the market apiece. Medtronic is only a marginal player at this point, with a couple-percent share at best in a category that could be worth as much as $5 billion globally.

I'm also concerned about Medtronic's cash flow generation, which has been tepid for a few years now. Cash flow from operations has fallen for three years straight, and although last year's weak cash flow was due to a $612 million litigation payment, the trends are still flat for a firm that trades for more than 20 times earnings, and which recently considerably increased its debt load.

I almost pulled the trigger when the stock traded below $45, but I now think that the risk/reward trade-off is a bit less compelling. Sure, Medtronic could keep posting solid top- and bottom-line growth trends, but the market is very cutthroat, and company fortunes can change quickly. (Just check out Guidant's woes before it was snapped up by Boston Scientific.) Until a better margin of safety comes along, Medtronic will remain on my watch list -- albeit at a fairly high spot.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.