Friday, July 4, 2014

Why Medtronic's Purchase of Covidien Makes Sense

Medtronic  investors are probably wondering what they could be getting with the acquisition of medical device company Covidien for $42.9 biillion. Simply put, Covidien's attraction is that its surgical equipment is helping it to outperform Johnson & Johnson  within the category, and fears of encroaching competition from Intuitive Surgical are probably overdone. Superficially, the company's forecast EPS growth rate of 7% for 2014 doesn't make it look like a high growth proposition, but for a host of reasons its growth is better than the headline numbers suggest. Let's take a quick look at three major reasons why Covidien is attractive to Medtronic.

Emerging markets
First, emerging market spending on health care is an exciting growth opportunity for the stock. For example, Johnson & Johnson's U.S. sales only increased 2.2% in its last quarter, while international sales grew 5.3% on an operational basis.

Although emerging markets only contributed 14.7% of Covidien's sales in the recent second quarter, they contributed 46% of the growth in the quarter. Moreover, as part of its growth plans for emerging markets, Covidien made an acquisition of a surgical equipment business in Brazil, and entered into a joint venture in China with a medical stapler company. Growth looks set to continue in 2014, with its emerging market sales growing 14% operationally in the second quarter and BRIC growth coming in at the "high teens".