Medtronic Down But Not Out (MDT, BAX, STJ)

Medtronic (NYSE: MDT) is down for the year, but not out. While the S&P 500 has staged a mighty rally over the past 5 weeks bringing the index solidly into positive territory for the year (up 5.9% including dividends as of October 5th) Medtronic has fallen 22.8%.

MDT is the world's largest medical technology/device company, and serves markets around the globe. 41% of 2009 sales were foreign with a fast increasing percentage of these revenues coming from emerging markets.

Traditionally Medtronic was known for cardiovascular devices, but over the past 10 years the company has steadily been able to diversify their offerings. Currently 33% of the company's sales come from this segment with the remainder coming from diabetes, vascular, neurological, and others.

Revenue and earnings growth over the past decade has been excellent. Over the past 10 years earnings have increased at an average pace of more than 10%, with revenues and dividends following suit. The predictability of earnings and sales also has been stellar.

Of course the medical technology field has strong demographic tailwinds for decades to come. In addition the strong international presence is sure to help loner term growth.

In the shorter term however there are some concerns. A recent earnings report showed disappointing trends and earnings in some important segments, with forecasts also being trimmed. In addition the balance sheet is not ‘fortress like', but good free cash flow and manageable debt levels should allow ample wiggle room if needed.

Even assuming earnings falling back 15%-20% from 2009 levels, and then returning only 3% long term growth from those levels the equity currently looks attractive. Using a conservative discounted earnings model $39-$41/share looks like a fair number which would represent 15-20% upside from here.

While you wait the 2.7% yield is decent and more than a 10 year treasury.

Medtronic (NYSE: MDT) closed up 2% to settle at $33.88/share on Tuesday.