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Medtronic Sneezes, Investors Feel Sick

Posted: Nov 24, 2008 10:17 AM by Stephen D. Simpson, CFA

Tickers in this Article: ABT, BSX, MDT, NUVA, STJ

The market has turned upside down. Citigroup (NYSE:C) is a single-digit midget; Wall Street is in flames; Warren Buffett could buy the Big Three automakers with his bridge money. The capper on all of this was Medtronic's (NYSE:MDT) earnings report earlier this week, as this leading medical technology company got thumped on an underwhelming quarterly performance and cautious guidance.

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The Quarter that Was
If Medtronic's recent performance was a failure or a disappointment, many other companies could only wish to be so lucky to fail like this. Revenue was up more than 14%. There were some problems however: cardiac rhythm management growth was single-digit (and the company almost certainly lost share to Boston Scientific (NYSE:BSX) and St. Jude (NYSE:STJ)), neurological, diabetes, and Physio-Control were lackluster, and Medtronic has some performance issues in its high-growth spinal business.

Competition the Contagion
I've been involved in the medical technology space for over 10 years now and I've grown accustomed to seeing Medtronic as the 800lb gorilla. Sure, there's always been competition in the company's markets, but Medtronic has almost always come out on top.

Now, though, the gorilla may be getting pushed around just a little bit. Medtronic has never really been able to carve out a preeminent spot in the stent market and even with the success of the Endeavor (revenue up 89% this quarter) product, it looks like Abbott Labs (NYSE:ABT) is going to steal some thunder there. This is also true in the spinal market where I think NuVasive (Nasdaq:NUVA) has some interesting things going on. Of course, Medtronic still has strong franchises in markets like CRM and diabetes, but even there Medtronic might be losing a little bit of traction.

Skip The Conventional Wisdom
Of course everybody knows that healthcare holds up like the Rock of Gibraltar when times get tough, right? Well, like most cases where "everybody" knows something, this isn't quite as true as some people like to believe.

It is true that you can't postpone a heart attack or car accident, but it is also true that people will sometimes hold off on non-life-threatening procedures in tough times, either because they can't afford the deductibles/co-pays or they don't feel that they can afford to take the time off of work to recuperate. What's more, products like insulin pumps may be a little less appealing when people fear for their paychecks.

I do believe that healthcare and medical technology will hold up relatively better than more discretionary sectors, but let's not kid ourselves into thinking that the healthcare space is airtight no matter what happens in the economy.

The Bottom Line
Medtronic is one of the premier franchises in healthcare. Even if there are some dents in the armor these days, I believe the company is likely to stay on (or near) the top of mountain for a long time to come. That said, Medtronic has often been valued and discounted as the top dog, so even slight stumbles are punished harshly. Prospective investors in Medtronic should keep that in mind. More is expected from those companies that have given more in the past, and the price can be steep when those expectations aren't met.

To learn more, read Investing In The Healthcare Sector.

By Stephen D. Simpson, CFA

Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.

Filed Under: Warren Buffett

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