EUR 850.00 For Business Accounts Only

Morningstar | MDT Updated Forecasts and Estimates from 27 Aug 2018

Medtronic delivered another quarter of impressive results, kicking off fiscal 2019 with a strong start. At first blush, quarterly performance generally met our expectations, and we're standing behind our fair value estimate of $105 per share. After adjusting for the sale of the medical supplies business to Cardinal, Medtronic's quarterly revenue increased 6.8% in constant currency. Considering most of the medical technology market is only growing in the midsingle digits and Medtronic's sheer size in this market, the last few quarters of the company's robust top-line growth is nothing to sneeze at and underscores the competitive strength of this wide-moat company. With Medtronic's share price steadily climbing over the last six months, we believe more investors are recognizing the firm's ability to sustain both top- and bottom-line growth.

As in previous quarters, Medtronic's performance reflected its substantial lineup of new products that are gaining strong adoption, including high teens growth from the TAVR heart valve and the launch of coronary stent Resolute Onyx, in addition to significant contribution from advanced stapling and neurovascular. Although we have often written about Medtronic's forward-looking approach to leveraging new opportunities offered by the shift to value-based reimbursement, investors shouldn't lose sight of the firm's ability to innovate on the technology front. This remains a critical factor in Medtronic's success. In addition to internally generated advances, such as the Intellis platform for chronic pain with AdaptiveStim and MRI compatibility, Medtronic remains in a strong position to vie for purchased innovation.

Finally, Medtronic, again, saw low-single-digit growth in cardiac rhythm management. This may not sound impressive in the absolute. However, both Abbott and Boston Scientific have launched comparable CRM devices recently. During these waning product cycles, we typically see slight declines at Medtronic. The firm has managed to stay in positive territory thanks to its risk-based contracting for its Tyrx antibacterial envelope for CRM devices. Medtronic's novel approach to this type of contracting make the firm a formidable competitor.

While other med-tech companies may also seek risk-based contracting opportunities, we think expertise in conducting and analyzing clinical studies is critical to pulling this off profitably. Medtronic's long-standing investments in research and development are paying dividends when it comes to risk-based contracting.

It also helps that so many of Medtronic's devices capture a lot of medical data. The firm's significant experience with clinical data leaves it well-positioned to work directly with payers, in addition to providers. If competitors aren't able to climb this learning curve quickly, we expect this dynamic to solidify Medtronic's competitive advantage through the midterm.