Medtronic Is Great but Its Stock Is Too Expensive for Now

NEW YORK (TheStreet) -- Medtronic (MDT) isn't the first name investors think of when asked about the global leader in medical technology. Most people think of Johnson & Johnson (JNJ).

But the Minneapolis-based medical device company hasn't let the lack of name recognition stop it from making headlines. Wednesday, Medtronic announced it submitted the final module of its pre-market approval application for its IN.PACT Admiral drug-coated balloon to the U.S. Food and Drug Administration.

This advances Medtronic's plans to introduce the new medical device for the treatment of peripheral artery disease afflicting millions of Americans. It has the potential to be a blockbuster if approved.

In addition, at last week's analysts meeting, Medtronic management emphasized its focus on revenue and earnings growth while remaining open to possible acquisitions if beneficial to the company's shareholders. Does that make Medtronic a possible suitor for British medical device company Smith & Nephew (SNN)?

The mere possibility of a merger pushed MDT to a 52-week high of $64.33 last week. Shares closed Wednesday at $61.17, up nearly 7% for the year to date.

What concerns me is the share price last week rose to a level where the dividend yield fell to a paltry 1.74%. When an investor compares that dividend yield to Johnson & Johnson's 2.72%, the scales tip decidedly against Medtronic.

Don't misunderstand: Medtronic is a great health-care company that has done a stellar job increasing the price of its stock. The following five-year chart demonstrates this graphically.

MDT Chart
MDT
data by YCharts


I loved the stock in August 2011 when it traded at $31 and still loved it when it traded at $40.68 in December 2012. But when I look at the chart and see that Medtronic's diluted quarterly year-over-year EPS growth (red line) has pancaked for the past three years along with its quarterly revenue growth I become concerned.

In the quarter ending April 25 year-over-year earnings growth fell by almost 54%. Year-over-year quarterly revenue grew a measly 2.4%. These are not the kind of metrics that empower a company to raise its dividend payout or offer much upside potential for shareholders.

The company reports current quarterly earnings and revenue numbers the week of August 18. My research suggests that Medtronic will report close to a 7% increase in EPS from the year-ago quarter and a 4% boost in quarterly revenue.

While these numbers are positive and I acknowledge the company's appreciable 28.4% operating margin, I'd encourage new investors to sit on their hands and wait until the shares price settles down before buying.

The stock experienced a sizable correction in the first quarter of this year. From a peak on January 8 of $60.93, shares of MDT began a correction that penetrated both the 50- and 200-day moving price averages down to a low of $53.33 on Feb.4, nearly a 12.5% drop!

This time could be different and a correction of that magnitude may be wishful thinking. Yet, unless the company takes steps that are immediately accretive to  earnings, another test of the 200-day moving average isn't out of the question.

This would offer a buying opportunity below $58, which would lift the dividend yield closer to 2%. Throw in the possibility of a dividend increase before the end of the year plus my $65 one-year price target and the total return potential on this medical tech titan is an adequate 15%.

At the time of publication the author had no positions in any of the companies mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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Marc Courtenay is the founder and owner of Advanced Investor Technologies LLC as well as the publisher and editor of www.ChecktheMarkets.com.

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