No Encore For Medtronic?
By EVELYN ELLISON TWITCHELL
June 8, 2000
At Carnegie Hall, a great performance gets a standing ovation. On Wall Street, people ask, "What are you going to do for an encore?"
That could spell trouble for one of health care's most-beloved players, medical-device maker Medtronic.
The Minneapolis-based company's record has been nearly flawless in recent years. Since 1995, it has grown both sales and earnings per share by more than 20% annually.
And the stock has responded in kind -- soaring nearly 2,000% over the past decade, easily topping the Standard and Poor's 500 Index's 300% gain in that period. Since March of last year, when Weekday Trader gave it a favorable write-up, Medtronic stock has zoomed 41% (see "Medtronic Looks Ready to Pick Up the Pace," March 3, 1999).
But now, some pros are cautioning that the shares look priced for perfection. And even the company's many fans acknowledge that growth will likely slow from its recent torrid pace.
"Fundamentally, Medtronic is strong," contends Bob Hopkins, an analyst at DLJ Securities. "But what makes stocks go up is when you see companies executing beyond expectations. And I don't think that's going to happen."
Historically, medical device stocks have done well when sales growth is accelerating. And they have underperformed when top-line momentum slows, observes Merrill Lynch analyst Daniel Lemaitre. He contends that the industry is at an inflection point in which many companies -- including Medtronic -- face such slowdowns over the next few quarters.
The company grew its top line by an impressive 26% in its fiscal fourth quarter, which ended April 30. But Hopkins expects that growth to taper off to 21.6% this quarter, 18.5% in the second fiscal quarter, 15% in the third and 11% in the fourth.
Even Glenn Reicin, an analyst at Morgan Stanley Dean Witter who rates Medtronic Strong Buy, concedes: "They're going to have tough comparisons. There's no doubt about it."
Why? Well, currency, for one thing. Medtronic generates more than a third of its sales internationally. So, the strong dollar took a 1.5% bite out of revenue in the most recent quarter and could hurt Medtronic's future numbers, too.
On a more fundamental basis, the company could surrender some recent market share gains in the key product areas of stents and defibrillators.
Medtronic more than doubled its share in stents -- tiny tubes used to prop open blood vessels after angioplasty -- to around 30% in the March quarter, up from about 13% during the same period last year. But new product introductions by Boston Scientific, Guidant and, especially, Johnson & Johnson, could trim that share back to about 24% by the end of this year, according to Goldman Sachs analyst Lawrence Keusch. (Medtronic stock is still on Goldman's Recommended List, however.)
That's one reason ABN AMRO analyst Girish Tyagi downgraded the stock to Hold from Buy earlier Thursday. Johnson & Johnson's new stent, which he estimates costs $150-$200 less than Medtronic's, could trigger price wars in that hotly competitive field. "The situation may ultimately be worse than the current fears," he tells Barron's Online.
Medtronic has done even better in defibrillators -- devices used to slow rapid heartbeats -- achieving its peak market share of about 54% in the first quarter. But there, too, it could lose some ground this year. Some analysts expect Guidant's competing Prizm defibrillator, launched in February, to get a good reception (see "Guidant May Regain Its Former Glow," April 4).
Rachael Scherer, Medtronic's investor relations director, counters that Medtronic has more than held its own in Europe, where competing devices have been on the market longer.
And Medtronic has diversified into other high-growth areas, such as neurology, which make stents less important. "We believe we'll continue to see accelerating growth," she contends.
At 47 1/4 late Thursday afternoon, Medtronic stock was about 18% off its all-time high of 57 7/8, set March 28. And the shares were changing hands at 45x First Call's consensus calendar 2000 earnings per share estimate of $1.05 -- or 2 1/2 times the company's projected long-term growth rate of 18%.
Investing pros who spoke with Barron's Online believe Medtronic's stock could return to 56 or so, but some see little up side from there over the next 12 months.
"The stock has come up so much already off its lows this year that I've got to believe that [it] is fully priced," says Michael Farr, a money manager with Farr Miller & Washington.
And Ken Kam, manager of the Firsthand Medical Specialist Fund, says he has trimmed his weighting in cardiac device stocks to 22% of the fund, down from 50%. "Bottom line, I'm not adding to the [Medtronic] position right now," he states.
Company executives appear to be lightening up, too. According to MSN MoneyCentral, seven Medtronic officers and directors have sold between $2 million and $3 million worth of stock each since the beginning of the year, at prices from about 42 to 55.
Company spokeswoman Jessica Stoltenberg says some executives' options were expiring, and some restrictions on trading were recently lifted.
Granted, Medtronic does have a diverse pipeline of new devices, such as the Jewel AF defibrillator, which could get Food and Drug Administration approval any day. Those new products could keep sales and earnings growth cooking. And health care stocks tend to do well in slowing economies, Reicin points out.
And of course no one is questioning the company's estimable record -- or its long-term potential.
"They do everything right," asserts Linda Miller, manager of John Hancock's Global Health Sciences fund.
But, ironically, in the short term, those high expectations could hurt the stock if Medtronic has the misfortune of proving that, alas, nobody's perfect.
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Let's see. Declined hard in spring 1999, rebounded in the fall. Never know when MDT becomes in fashion. Long term buy and hold. It will be there in 2010.
Jack |
