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Medical device giant Medtronic PLC (NYSE: MDT) squeezed a lot of good news into its fiscal first-quarter earnings report last week.
The Dublin, Ireland company that makes devices for a range of chronic illnesses and common ailments reported that total revenue grew sharply and that most divisions – from its cardiovascular group to its minimum invasive therapies group – performed well. And more than seven months after it closed its acquisition of Covidien PLC, the integration appears to be on track.
There are a couple of factors that makes it difficult to do a straight year-over-year comparison. For one, last year’s earnings did not include Covidien’s results, so much of the company’s total growth is the result of that acquisition. Also, this year’s first quarter had one more week than the year-ago quarter, due to the fact that every six years Medtronic has a 53-week fiscal year.
Nonetheless, Medtronic did provide some adjustments to its total sales and earnings numbers and said that even after adjusting for the extra week – and even when restating year-ago numbers to incorporate Covidien’s results – growth remained solid. With all these adjustments there were a lot of numbers circulating. Here are some highlights:
- Net income fell about 6% to $820 million, partly reflecting acquisition-related and consolidation costs. Non-GAAP income was up 47% to $1.46 billion.
- Total revenue rose 70%, largely due to the acquisition of Covidien. When including Covidien results in the year-ago quarter, sales were still up 12% to $7.27 billion.
- Revenues (adjusted to include Covidien’s year-ago numbers) rose 15% in the Cardiac and Vascular Group; 11% in the Minimally Invasive Therapies Group; 10% in the Restorative Therapies Group; and 15% in the Diabetes Group. After adjusting for the extra week this year, sales were up a smaller percentage, but they increased nonetheless. In other words, no matter how you measure it, first-quarter revenue growth was solid.
- The company reiterated its guidance for full-year revenue growth in the range of 4%-6%, adjusting for the acquisition of Covidien.
So back to the original question, what is not to like about Medtronic?
The short answer is, not much. The numbers the company reported, examined from a variety of angles, all look solid. It’s worth noting, however, that Medtronic stock fell 2% on Thursday after reporting earnings before the opening bell. While Medtronic stock has doubled over the past five years, it’s now down about 2% year-to-date.
This turn in a more lackluster direction could reflect doubts that the company can sustain a strong clip of growth, or it could just be that with a price-earnings ratio around 32, Medtronic stock has gotten ahead of itself.
There’s also a fair amount of uncertainty in the health care sector amid reform in the U.S., which accounts for a large share of Medtronic’s business. To be honest, I’m not sure why investors aren’t more excited about this solidly performing company, but I do think that investors need to beware when considering a stock that’s had such a strong run-up.
When buying a stock, investors should have faith not just in the underlying business but also that the stock price has more room for growth. On that second point, there seems to be some doubt surrounding Medtronic stock.
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