Medtronic -- Benefiting From Emerging Market Growth, Aging Population

NEW YORK (TheStreet) -- Investors who have poured their faith into health care stocks have made tons of money as evidenced by the 26.5% returns delivered by the health care sector over the past 12 months. That's tops in the market with the tech sector coming in second with better than 18% 12-month gains.

One of the beneficiaries of the strong health care movement has been Medtronic (MDT), a Minneapolis-based medical device manufacturer, which is due to report fiscal fourth-quarter and full-year earnings Tuesday before the opening bell. Medtronic's focus on market share expansion in such areas as China, combined with an aging population in need of its services, MDT stock is a place investors can profit in the years ahead.

Granted, MDT shares aren't in the value bin today -- not at 24 times earnings, compared with a P/E of 21 for the S&P 500. And it looks even less appealing with shares trading at near record highs, up almost 7% on the year to date. But that won't matter in the next five to 10 years. Investors can still do well buying MDT stock.

Consider, even at its current level of around $76, Medtronic has done enough to warrant a consensus analyst buy rating and an average 12-month price target of $87, suggesting 13% gains from current levels.

From my vantage point, even if the shares were to reach $87 today, MDT stock would still look undervalued, especially when factoring in its acquisition of Covidien, which now grants Medtronic to new markets like weight-loss surgery, for instance. Medtronic immediately became better diversified with new growth businesses to complement its strength in such areas as insulin pumps and spinal implants.

Perhaps the main reason to own Medtronic? The company operates in a thriving industry, buoyed by an aging baby-boomer population, where (on average) 10,000 boomers will be retiring per day in the next 10 years. And these baby boomers will rely on the medical devices Medtronic specializes in. Medtronic has already seen some of these benefits in its fiscal third quarter, reporting an adjusted profit of $1.01 per share, beating estimates by 4 cents.

What's more, Medtronic is also actively shopping for deals, targeting emerging markets, like China. To sell its surgical tools, pacemakers and cardiac and spinal implants, Medtronic has begun to focus on community hospitals outside some of the largest areas in China, which accounts for 5% of its annual sales.

Medtronic, which now boasts 12% of its annual sales in emerging markets, wants to grow that level to 15%. One of its strategies is to seek out small Chinese medical device companies as potential acquisitions.

So not only is Medtronic looking to capitalize on the domestic aging population that will rely on health care benefits spurred by the Affordable Care Act (Obamacare), the company is hedging its growth overseas, too. For this reason, it matters little what the company reveals Wednesday for one quarterly report. Making a play on MDT stock is about the future, or the next five to 10 years.

In that vein, the company's projected long-term growth rate of 7% doesn't fully reflect that potential. Mid-double-digit is the more likely outlook. Assuming MDT can achieve its 15% growth target in emerging markets, combined with gains in established regions, these shares can reach $95 to $110 in the next two to three years, delivering upwards of 40% gains.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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