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Medtronic (MDT) Positive on Mazor Purchase, Rising Costs Ail

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On Nov 23, we issued an updated research report on Medtronic plc (MDT - Free Report) ). While we are encouraged by the company’s globally accepted advanced therapies, its escalating costs and expenses, however, raise concerns. The stock has a Zacks Rank #3 (Hold).

Over the past six months, shares of Medtronic have outperformed the industry. Per the last share price movement, the stock has grown 6.7% against its industry’s 2.6% fall.

Notably, Medtronic posted better-than-expected numbers in second-quarter fiscal 2019. All major business groups contributed to the company’s solid top-line growth at CER, highlighting sustainability across groups and regions in addition to displaying achievement of synergy targets. We are encouraged by Medtronic’s strong growth trend in the United States after adjusting for the divestitures as well as the healthy global acceptance of its advanced therapies.

Also, the gradually stabilizing Cardiac Rhythm & Heart Failure (CRHF) market holds a lot of promise. The company is also focusing on geographical diversification of its businesses. This apart, it has been seeing certain favorable developments in its Diabetes business. Medtronic is highly positive about its foray into the $1-billion standalone continuous glucose monitoring (CGM) market with its Guardian Connect.

We are currently upbeat about the company’s recently-launched restructuring initiative called Enterprise Excellence plan, aimed at $3-billion annual growth run rate savings by the end of fiscal 2022. According to the company, this new program has been designed to increase its effectiveness and enabled reinvestment for growth along with driving consistent margin expansion and EPS leverage.

At the end of the second quarter, Medtronic stated that the Enterprise Excellence program is being successfully executed as evident from margin expansion in the period. Per the company, it is confident about delivering the estimated 50 basis points of full-year underlying operating margin expansion despite the mixed impact of China tariffs and expected dilution from the Mazor Robotics acquisition.

Meanwhile, we are optimistic about the impending integration of Mazor Robotics, which is expected to fortify Medtronic's position in robotic spine surgery. The buyout will combine Medtronic's market-leading spine implants, navigation and intra-operative imaging technology with the acquired company's robotic-assisted surgery (RAS) systems.

On the flip side, the company has been grappling with steep costs and expenses, weighing heavily on its margins. Also, its 2019 guidance remains conservative on the apprehension of a significant currency headwind.

Key Picks

Some better-ranked stocks in the broader medical space are Integer Holdings Corporation (ITGR - Free Report) , Surmodics, Inc. (SRDX - Free Report) and Veeva Systems (VEEV - Free Report) .

Integer Holdings has an expected earnings growth rate of 31.2% for the fourth quarter of 2018 and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Surmodics’ long-term earnings growth rate is projected at 10%. The stock carries a Zacks Rank of 2.

Veeva Systems’ long-term earnings growth rate is estimated at 19.3%. The stock is a Zacks #2 Ranked player at present.

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