EUR 850.00 For Business Accounts Only

Morningstar | Medtronic Saw Strong 2Q Results; No Change to Our FVE

Despite foreign exchange headwinds, Medtronic posted another quarter of strong, above-market growth that generally met our expectations, and we’re holding steady on our fair value. Medtronic saw strength across many of its product categories thanks to increasing adoption of new products. The firm’s ability to consistently roll out new technologies underscores our view that Medtronic enjoys a wide economic moat. Moreover, regulatory and reimbursement hurdles have risen higher as value-based reimbursement has taken hold among providers and payers. These higher barriers to entry make it even less likely that any new entrants could disrupt the established cardiac device makers.

We’re impressed with Medtronic’s 7.5% organic revenue growth during the second fiscal quarter, compared with the prior-year period, particularly because it was fueled broadly by CoreValve Evolut Pro TAVR, double-digit growth in TYRX antibacterial envelopes, LigaSure for vessel sealing, and strong demand for Medtronic’s stent retriever for use in ischemic stroke patients and its new spinal cord stimulation platform. As we’ve discussed before, Medtronic’s broad portfolio offers the benefit of having waxing product cycles offset other waning product cycles.

We also recognize that gross margin has improved approximately 230 basis points over the last two years due to efficiency efforts. This has pushed gross margin over 70% for the last four quarters. Although this remains lower than the 75% gross margin that Medtronic delivered before it acquired Covidien, it remains a significant improvement over the mid-60s when Medtronic first added Covidien. The firm remains on track to hit our projection for 60 basis points of operating margin improvement in fiscal 2019.