Devices & Diagnostics

Medtronic is aging gracefully, according to WSJ

Medtronic is aging gracefully, according to Wall Street Journal writer John Jannarone. The Fridley, Minn., medical device maker hit its prime around 2000, but has consistently missed growth targets in the past decade as its annual revenue grew past $10 billion, Jannarone wrote in a Heard on the Street column. But after going on a […]

Medtronic is aging gracefully, according to Wall Street Journal writer John Jannarone.

The Fridley, Minn., medical device maker hit its prime around 2000, but has consistently missed growth targets in the past decade as its annual revenue grew past $10 billion, Jannarone wrote in a Heard on the Street column.

But after going on a diet two years ago, Medtronic has weathered the recent economic storm “better than most” and is “a stronger company today,”  CEO Bill Hawkins said during his fiscal third-quarter chat with securities analysts.

“We have changed the way we pursue innovation both internally and externally,” Hawkins said. “We have been disciplined about optimizing our portfolio through more efficient and effective resource allocation. We had the courage to make restructuring calls over the past two years, including de-layering the organization and increasing span of control.”

As a result, Medtronic said in February that its third-quarter profits jumped nearly 20 percent, prompting the company to raise its 2010 earnings-per-share growth guidance to between 12 percent and 13 percent over 2009. That’s not bad for a middle-aged technology company.

Medtronic is targeting sales growth of 5 percent to 8 percent per year, Jannarone said. So if the company wants to keep up the double-digit profit increases in coming years, it will have to cut costs or limit its growth.

That’s where age becomes an advantage, Jannarone said. Medtronic already has invested in a sales, general and administrative infrastructure. That means its system can accommodate more capacity with modest additional spending.

Medtronic also may be better positioned to navigate health care reform than rivals Boston Scientific and St. Jude Medical, he said. The new medical device tax is based on revenue. With the highest profit margin in its industry, Medtronic stands to suffer less by taking the 2.3 percent tax off the top line.

In addition, Medtronic sells more spine and diabetes devices than its competitors, according to analyst Kristen Stewart of Credit Suisse. More of these devices are likely to be sold as health insurance coverage grows.

That said, some of Medtronic’s spinal businesses are in “rebuilding mode,” Hawkins said in February. Spinal revenue fell 1 percent in the third quarter from a year ago. However, diabetes revenue grew 8 percent from the year-ago quarter after accounting for foreign currency fluctuations.