Medtronic Focused on China

With the focus to strengthen its presence in China, Medtronic ( MDT - Analyst Report ) inaugurated its Innovation Center in Shanghai, the first outside the US and Europe. This is in sync with the company’s strategy to create local product research and development in that region. This center will collaborate with the global teams, local physicians, universities and research institutes to provide solutions for patients.

Globalization is a strategic driver of growth for the company. The immense potential for growth can be attributed to the increase in wealth as well as healthcare becoming a government priority in the markets of many emerging countries.

According to the recently reported first quarter results, Medtronic derived 44% of its total sales from the international market, which climbed 6% year over year at constant exchange rate or CER to reach $1.781 billion. As a result of the company’s focus on the emerging markets, revenues from this region experienced continued growth momentum and increased 14% at CER to $438 million.

This region now represents 11% of total company revenues. The company is confident about maintaining the growth momentum in this region, which over the next 3-4 years should contribute 20% to total revenues.

Considering growth in China is the fastest among the emerging countries, Medtronic strategically plans to boost its employee strength there. Within the next decade, China will be the largest health care market in the world, outpacing the US. The company plans to hire another 1000 people over the next five years, of which many will work on the product development platform within the Innovation Center.

Recommendation

Medtronic is focusing on the emerging markets primarily to offset the hindrances it faces in two of its largest markets – US defibrillators and US spinal implants. We are encouraged with the company’s portfolio expansion strategies. However, contributions from new products are not significant yet to drive top-line growth. The company’s recently launched Resolute Integrity in the US has enabled it to gain market share.

Meanwhile, Medtronic continues to target returning 50% of free cash flow to shareholders. However, unfavorable currency and macroeconomic uncertainties in Southern Europe adversely affected sales during the first quarter. These headwinds have also adversely affected the company’s peers including St Jude Medical ( STJ - Analyst Report ) and BostonScientific ( BSX - Analyst Report ) .

We have a Neutral recommendation on Medtronic. The stock retains a Zacks #3 Rank (Hold) in the short term.