Hope all in the Real Money community had a happy Thanksgiving. We are moving a little more slowly than usual around Casa Jensen this morning as I get adjusted to carrying an extra belt size -- I hope temporarily. This would probably be a great lead-in for an article on Weight Watchers (WTW); unfortunately I am currently just neutral on the stock.
However, given that my cardiovascular system feels as if it working 50% harder today than normal as it clears out the vast amounts cholesterol in my body (someone brought a pecan cheesecake to the festivities), right now it works for another stock I have had my eye on: Medtronic (MDT). This medical-device company makes the pacemakers and other implantable heart devices that I probably would need right now if Thanksgiving were a weekly event.
More important, shares are trading at a very reasonable valuation, and Medtronic has recently picked up some positive catalysts. For instance, this week Northland Securities reiterated its "outperform" rating on Medtronic and raised its price target to $46 a share, while Piper Jaffray has raised its price target to $48 and is maintaining its "buy" rating on the name. The latter analyst cited the company's conservative guidance and solid performance in the recently reported quarter.
Furthermore, competitor St. Jude Medical (STJ) is having more trouble with its defibrillator product line, and a recent report from the Food and Drug Administration caused the stock to plunge some 12%. The problem centers around the insulation to a lead, which degrades too quickly. Incidentally, Medtronic rejected this same insulating material in its own devices. This unfortunate turn of events for St. Jude could boost Medtronic's market share in this space.
Here are six more reasons Medtronic is a solid value at just over $42 a share:
1. The stock has a nice dividend component. It yields at a decent 2.4% and, more important, the company has raised its dividend payout at better than a 13% annual average pace over the past five years.
2. The stock is selling near the bottom of its five-year valuation range, based on its price-to-earnings, price-to-book, price-to-cash-flow and price-to-sales ratios.
3. Medtronic is selling at a reasonable 11x forward earnings, a bit under its five-year average of 12.1x.
4. The company has an A+ balance sheet and a lower beta, 0.84, than the overall market. That should appeal to conservative investors.
5. The company is ideally situated for the long-term aging of the population.
6. True, for most of the year the medical-device sector has had the headwind of a small new health-reform-related tax that's set to start in 2013. But, once the tax gets implemented, this concern should be removed as the law's impact is fully priced into the stock.