Prudential Bache Investment Opinion: 12/04/98 at $70
We rate MDT an ACCUMULATE/SBI for the following reasons:
* We believe near-term and longer-term MDT has the ability to outperform its peers. We expect several new product introductions to significantly improve the underlying revenue growth of several higher margined products to drive accelerating revenues and earnings.
* MDT is expected to receive FDA approval for its Kappa 700. Unlike the Kappa 400 which was a market niche product focused on the higher end, more active segment of the patient population, the Kappa 700 is expected to be a main workhorse product addressing the general population of pacemaker patients. Thus, penetration of the Kappa 700 into Medtronic's current pacemaker business is expected to be well in excess of 50% after full launch, versus the 35% currently seen with the Kappa 400. We believe the Kappa 700 will command a price premium, as well as be margin enhancing.
* MDT received final FDA approval (10/12) for its Gem DR, MDT's dual chamber rate adaptive implantable cardiac defibrillator (ICD), leveling the playing field between MDT and Guidant (GDT) in the ICD market. Guidant currently has a significant lead, as its Ventak AV II (in the market since July 1997) being the only dual chamber, rate responsive ICD available in the U.S. market, followed by the Ventak AV III approved 9/9/98. MDT's Gem DR, is a 62cc device, which can deliver output of up to 35 joules, and has about 22 minutes of electrogram strorage from either the atrium or ventricle, or 12 minutes of electrogram strorage from both chambers. This compares with GDT's Ventak AV III, at 58cc, 27 joules, and about 16 minutes of electrogram storage.
* We expect the neurological segment to continue to post robust if not
accelerating growth as MDT garners the dividends of its physician training and education in newer products, like the Activa neurostimulation device for Parkinson's disease. Finally, we expect the vascular division to be neutral to earnings during FY99.
* MDT announced 11/2 its intent to do a pooling transaction of a tax-free stock swap with Sofamor Danek Group (SDG) (valued at $3.1 billion and expected to close 4Q99 (April)). SDG is a leader in the spinal surgery market, which we believe gives MDT a greater presence in the neurological field. We expect the merger to be neutral near-term, but modestly accretive in perhaps FY01.
* MDT announced (11/30) the acquisition of Arterial Vascular Engineering (AVEI), a move we view strategically as both offensive and defensive, but also as a modest positive. The transaction is a tax-free stock swap valued at about $ 3.7 billion $54 per share, with the close anticipated by the end of the 1Q99. We thus raised our earnings forecast to $1.55 proforma from $1.45 for fiscal year (FY) 1999 (ends April) as well as FY00 to $1.95 from $1.82. MDT's management held an analyst' meeting (12/1) which further reinforced our confidence in MDT's prospects. |
