Medtronic is one of the world’s leading medical-technology firms. The company specializes in cardiac-rhythm and electro-physiology treatments, spinal surgery, heart and circulatory-system operations, neurology, diabetes, internal navigation and imaging and neurosurgery. Medtronic has been a leading manufacturer of devices used in combating cardiac rhythm abnormalities, such as pacemakers and defibrillators. While this established business generates important cash flows for the company, its volume growth is slow. In recent years,
Medtronic is engaged in an ongoing diversification process. The company has been able to achieve significant revenue growth with newer types of therapies, particularly in the field of neuro-modulation. It’s recent purchase of Covidien (June 2014) and its relocation of its tax domicile to Ireland attracted considerable attention. The merged company has reduced its dependence on its core business, while also significantly broadening its product portfolio (to include more medical devices and consumables for use in hospitals). Thanks to its size and its research budget, Medtronic is well positioned in the market. The risks for companies like Medtronic mainly relate to the success of its new products and to increased political pressure on healthcare costs, rather than to the state of the overall economy.
Nevertheless, new products should enable the company to achieve revenue growth in low to middle single digits, while the Covidien acquisition will incrementally increase Medtronic’s growth prospects further. Sales growth in the fourth quarter of 2014 accelerated to 7% year-on-year, well above medium-term expectations. The shares’ valuation is well supported by the company’s strong free cash flow, which makes Medtronic an attractive healthcare investment for the years to come.