Medtronic: Devices and Prices

Medtronic is a star of the medical-device industry, leading the markets for pacemakers, implantable cardioverter defibrillators (ICDs), neurological devices and spinal products. And there's more where that came from -- its pipeline of new products is deep. But the company's stock looks like it suffered a coronary this year, dropping 14% since mid January.

The problem is Medicare. Cowen Co. analyst Dhulsini de Zoysa says Wall Street is worried that possible cuts in Medicare reimbursement rates, particularly for ICD therapy, could hurt Medtronic's profitability. The stock's recent decline makes it unusually cheap, and he suggests investors take advantage. The stock (MDT), recently $52, trades at just 18 times de Zoysa's calendar 2007 earnings estimate of $2.79 per share -- near its lowest valuation in ten years, he says.

De Zoysa thinks concerns over reimbursements are overblown. While rates could drop, he doesn't think drastic changes are likely. And besides, ICDs account for less than one-third of Medtronic's revenues. That means the company can withstand changes that could hurt less-diversified companies, such as St. Jude Medical (STJ), he says.

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Medtronic is planning to launch a number of products to drive sales growth, including cardiac rhythm management products, artificial discs and a treatment for diabetes. Its hopes that its drug-eluding stent, which is already available in Europe, will be approved for use in the U.S. next year. De Zoysa expects Medtronic to continue spending heavily on research and development, about 10% of yearly revenues.

Analysts, on average, expect Medtronic to earn $2.52 per share in the fiscal year that ends April 2007, according to Thomson First Call.

--Lisa Dixon