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.
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".
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