Medtronic PLC (NYSE:MDT) is a company with few rivals from other healthcare stocks. It supplies medical equipment, invests in acquisitions, and conducts research and development. Everything Medtronic does points to continuous growth. It’s no wonder that MDT stock has gained 11.65% year-to-date.
Medtronic boasted a net income of $1.44 billion for its first financial quarter of 2016. In the critical earnings per share (EPS) department, Medtronic gained 15%, or $1.03 per share. That was just slightly higher than the consensus of $1.01 per share, which perhaps explains why Medtronic stock has been trading flat in the past few days. Yet this flat course is unusual for MDT, which is usually seen taking off on any given chart.
More Upside for Medtronic Stock?
MDT stock has gained no less than 151% in a nice steady climb. The company has not given any indication that this boom cycle is coming to a close anytime soon. Medtronic’s guidance is the stuff that investors want to hear all the time; for the entire 2016–2017 financial year, the EPS grew from 12% to 16% and revenues increased five percent to six percent.
But there’s plenty more to Medtronic stock than the earnings. Medtronic’s revenue growth has no doubt benefited when it bought its competitor, Covidien Ltd (NYSE:COV), for $42.9 billion in 2014. This enabled MDT to move its corporate headquarters to Ireland and save on taxes. Indeed, in Ireland, where Covidien is based, the tax rate on profits (12.5%) is much lower than in the U.S. (35%).
Thanks to this acquisition, not only did Medtronic absorb a competitor, it gained access to a market of over 150 countries, dominating the manufacturing and sales of orthopedic and cardiovascular devices, as well as surgical instruments. The tax savings are just a bonus. It was essentially Medtronic that set the path for other pharma giants in search of profits to follow. Pfizer tried to adopt this strategy by throwing its sights on the British AstraZeneca plc (LON:AZN). This may not be “morally superior.” Still, if you ask shareholders whether they need more morality or more profits in their life, I wager that profits win 99 times out of 100.
But Medtronic was mindful about that minor one percent in a rare display of management sophistication. Sensitive to the debate around corporate governance and staying ahead of the curve, rather than staying merely within it, Medtronic has maintained its commitment to the United States by pledging to invest $10.0 billion over the next decade at home. Medical technology is crucial for the U.S. economy, so investors can rest assured that Medtronic’s promises are not empty words. In the biotech sector, it’s not hard to run into $10.0 billion or higher acquisitions.
Earlier in the week, Medtronic completed the acquisition of HeartWare International Inc (NASDAQ:HTWR)—a pioneer in developing new treatments for cardiovascular diseases—for about $1.1 billion. While addressing medical needs and, by all accounts operating within the medical sector, Medtronic has significant advantages, especially at its current slightly devalued price compared to biotech firms. It doesn’t have the same risk of failure.
A failure for Medtronic can be addressed at the drawing board. A failure at a biotech can mean millions of dollars down the drain and the deletion of years of work and investment. Meanwhile, Medtronic also benefits from operating in the medical sector, marked by the same relentless demand stemming from people’s innate desire to survive, improve their health, or look better. Indeed, Medtronic has an important market in designing and selling tools for surgery targeting obesity. (Source: “Medtronic launches bariatric surgery tool to enable more consistent procedures,” FierceBiotech, June. 9, 2015.)
The Bottom Line on MDT Stock
Medtronic develops devices that are engineered with a much higher probability of success than a biotech firm. Biotech firms invest in developing new and often highly welcome drugs, but—more often than not—clinical trials fail, or the side effects of a given drug outweigh its benefits. Medtronic, meanwhile, relies more on engineering than biology. That simply means it faces fewer and more controllable risks.
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