The strength of the dollar, active litigation, regulatory hurdles, a stressed out economy and strong competition from smaller, more adept companies that can change quickly in response to changing markets and new products are all cited to explain the latest disappointing earnings report from Medtronic (MDT).
The company said that it expected lower earnings and issued cautions for the coming quarters. The news led investors and some analysts to downgrade the company’s stock.
All these factors do have an impact on the performance of Medtronic, which is by a wide margin the largest of the medical equipment manufacturers in the country, but only in the short term.
In part, because of its size, its growth rate has recently been lower than many of its competitors, but nonetheless continues to be in the high teens. The company has not survived, thrived and grown in the face of operating in an extraordinarily difficult industry without some special assets.
Throughout its history Medtronic has benefitted from unusually strong and consistent leadership. It has been led by only four Chief Executive Officers in its 50 year history. Founder Earl Bakken and successors Win Wallen, Bill George and Art Collins all have subscribed and committed to the principals of leadership which place customers and employees ahead of shareholders in the company’s value system.
The basic premise of this belief is that shareholders reap the benefit of attention to customers and a committed workforce through loyal customers and committed employees. For many years this approach made Medtronic a success story.
Today is a different story, and now that belief system is being put to the test in this environment.
One thing is certain—Medtronic is not likely to deviate from its approach no matter the circumstances. The company continues to lead its competitors in the introduction of products and expansion into new markets.
Historically, Medtronic has done an excellent job of being good corporate citizens and providing a valued rate of return for its investors. Although the company has always emerged from stress stronger and more profitable for shareholders, it is understandable that investors are reluctant to commit to invest in the common stock in the current environment.
The wild swings in the stock market can’t help but produce jitters for the individual investor.
As an alternative to equity risk, Medtronic has a wide variety of debt instruments that are actively traded. Currently Medtronic five year bonds are trading at a yield approaching 6.4%. Being actively traded, these bonds offer investors a high level of liquidity.
Medtronic’s strong management team should ensure that cash flow is sufficient to pay bond holders through maturity.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
James F. Dlugosch contributed to this article. Jim has over 40 years experience in the credit markets including serving as Director of the Minnesota Housing Finance Agency in the 1970’s. He also led the fixed income group of a large regional brokerage firm before owning his own firm that specialized in underwriting and trading fixed income securities. He is a contributor to The Rational Investor, but most importantly he is my father.
