We have recently downgraded Medtronic (MDT) to Neutral as a result of limited upside potential to the stock at the current level. At present, Medtronic’s stock is trading at roughly 12.5x our fiscal 2011 EPS estimate of $3.50, higher than the peers’ mean of 11.5. This provides a limited upside potential. Therefore, we have downgraded the stock to Neutral with a target price of $45 based on a P/E of approximately 12.9x our fiscal 2011 EPS estimate of $3.50.

The company reported second quarter fiscal 2010 earnings per share of 77 cents, compared to the Zacks Consensus Estimate of 74 cents and the year-ago earnings of 67 cents. It also registered growth in its top-line and expanded margins in the second quarter. However, Medtronic’s cash balance declined by roughly 8% in the first half of fiscal 2010.

Medtronic is one of the world’s leading medical technology companies, specializing in implantable and interventional therapy devices and products. The company’s closest rivals are Boston Scientific Corporation (BSX) and St. Jude Medical (STJ).

Medtronic’s long-term growth story remains intact even though we downgraded the stock to Neutral. The company’s management has a typical “ONE Medtronic” approach that encompasses the following goals: drive sustainable long-term growth of 9%?11% through innovation, focus on operating margins ? increase by 300 to 400 basis points, EPS growth of 11%?14% and return a minimum of 40%?50% of free cash flow to shareholders annually, and align the organization for consistent execution.

Zacks Investment Research

1. (MDT) Medtronic in a Legal Tussle With MedgraphMedtronic, Inc. (MDT) recently entered into a legal tussle with Medgraph Inc, whereby the latter...
2. (MDT) Medtronic Beats Analysts EstimatesMedtronic, Inc. (MDT) reported second-quarter of fiscal 2010 earnings per share of 77 cents, compared...
3. (MDT) Medtronic, Inc Launches New Bone GrafterMedtronic, Inc. (MDT) recently launched MASTERGRAFT Strip – a new, highly flexible ceramic scaffold used...
4. (MDT) Medtronic Starts Erectile Dysfunction Drug-Eluting Device StudyMedtronic, Inc. (MDT) recently started a feasibility study of an interventional treatment for erectile dysfunction...
5. (MDT) Medtronic Launches KYPHON System to Treat Vertebral Compression FracturesMedtronic, Inc. (MDT) recently launched the KYPHON Cement Delivery System [CDS] in the U.S. on...
6. (MDT) Medtronic Recalls Defibrillator ProductMedtronic, Inc. (MDT) is recalling some LifePak CR defibrillators as humidity may cause them to...

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