Last month, Medtronic's (NYSE:MDT) first-quarter earnings topped consensus estimates on the top and bottom lines, as revenue rose 5% year over year to $4.27 billion and non-GAAP diluted earnings climbed 6% to $0.93 per share. Medtronic posted positive sales growth across all three business groups -- cardiac and vascular, restorative therapies, and diabetes -- with the diabetes group posting impressive 13% growth thanks to strong sales of the MiniMed 530G.
Despite those robust earnings, Medtronic stock has remained nearly unchanged since the report, so investors are likely wondering if the stock will rise or fall in the near future. In a previous article, I discussed three reasons Medtronic stock could fall. In this article, I'll highlight three reasons that it could also rise.
The Covidien acquisition could lead to a higher dividend
Medtronic's proposed $42.9 billion acquisition of Dublin-based Covidien (UNKNOWN:COV.DL) will benefit the company in two ways -- a lower corporate tax bill and a much larger, $3.7 billion per year footprint across high-growth, emerging markets.
However, an additional benefit could be a higher dividend. Since Medtronic is currently based in the U.S., all of its foreign profits (54% of its bottom line before taxes) must be repatriated to the U.S. before they can be used to pay dividends. That causes them to be taxed at the 35% U.S. corporate income tax rate, minus any foreign taxes already paid. If Medtronic moves to Ireland, that rate drops to 12.5%. Since Medtronic pays out nearly a third of its profits as dividends, that move would likely result in a much higher dividend for shareholders.
Attracting more income investors would definitely fit into Medtronic's long-term strategy, since the company has raised its dividend for 37 consecutive years. In June, the company raised its quarterly dividend 9% to $0.305 per share, increasing its forward annual dividend yield to 2%. While that rate is definitely better than rival St. Jude Medical (NYSE:STJ), which pays 1.6%, it's still significantly lower than Johnson & Johnson's (NYSE:JNJ) rate of 2.8%.
The massive growth potential of the CGM market
Medtronic's MiniMed 530G with Enlite, which the FDA approved last September, consists of a continuous glucose monitor, or CGM, which commands an insulin pump to shut off insulin delivery when glucose levels fall below a preset threshold, making it the first "wearable artificial pancreas" in history.
This allowed Medtronic to simultaneously gain market share in the CGM and insulin pump markets. Since the MiniMed 530G's introduction, the diabetes group has posted double-digit sales gains for three consecutive quarters.
The global CGM market is expected to grow from $194.8 million in 2012 to $568.5 million by 2020, according to Allied Market Research. That growth is expected to be driven by a preference of CGMs over conventional devices and a rise in diabetes cases across the world.
The MiniMed 530G could soon face competition from Johnson & Johnson and Dexcom's (NASDAQ:DXCM) Animas Vibe, which could soon be approved by the FDA. However, the CGM market has such strong growth potential that there could be plenty of room for both products as well as other competitors. Meanwhile, Medtronic's next generation MiniMed 640G, which can predictively shut off insulin before low thresholds are met, could keep it a step ahead of the competition.
Competitive pressure will lead to more innovative products
Competitive pressure means that Medtronic will keep launching cutting-edge devices to remain ahead of the competition. Medtronic's fierce rivalry with St. Jude Medical yielded two of the company's most innovative products -- the Reveal LINQ miniaturized implantable cardiac monitor, or ICM, and Activa "brain pacemaker."
The Reveal LINQ is about one-third the size of a triple-A battery and about 80% smaller than comparable ICMs. The device is smaller than St. Jude's battery-size pacemaker, which the company gained through its acquisition of Nanostim last October. Both devices are leadless (they don't require wires that connect to the heart) and implanted through the femoral artery in the thigh. During Medtronic's conference call, CEO Omar Ishrak attributed the 4% growth of the cardiac rhythm and heart failure business -- a level not achieved in four years -- directly to strong demand for the Reveal LINQ.
Medtronic's Activa brain pacemaker uses deep brain stimulation, DBS, to treat neurological disorders like Parkinson's disease. DBS systems helped Medtronic's neuromodulation revenue rise 11% year over year to $479 million last quarter. St. Jude is also competing against Medtronic in this field with similar DBS devices.
Stronger competition in ICMs, DBS systems, and artificial pancreases should encourage Medtronic to launch innovative new devices which could generate strong sales and keep it ahead of its rivals.
A Foolish final word
In conclusion, Medtronic is a solid company which still has plenty of opportunities for fresh growth. A bigger dividend, a growing presence in the insulin pump and CGM market, and newer products on the horizon are just three reasons that Medtronic could still be a great long-term investment, even as the stock flirts with all-time highs.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Covidien and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.