YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

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Yeah, right! Yes, you can. I don’t know anybody in a life or death matter who would say, “Doc, I’m strapped for cash, can’t afford that stent.” The numbers Medtronic reported today support that. In an economy needing a defibrillator, last year Medtronic seemed immune to the downturn. Revenues were very robust, up 8% despite a strong dollar (more than 1/3 of their revenues are overseas in 120+ countries). In fact, all of their 7 businesses grew year over year, with five of them growing in double-digit territory.

What’s been holding their stock down? First, health care reform could affect future revenue as their products are subject to Medicare reimbursement rates. Also, as with many other health care companies, there is always the patent expiration issue and the legal issue. Over the last few years, Medtronic has made a number of voluntary recalls which can also hurt confidence in their products (Although, fatalities have been few and some suits brought against them were recently dismissed in a court victory in February). There has also been rumor that their sales reps have engaged in inappropriate marketing methods. Finally, their forecast for the upcoming years was less upbeat than what analysts had hoped for.

However, we feel the market has overreacted, for there is much to cheer about. Medtronic is the world’s largest manufacturer of implantable devices and famed for inventing the pacemaker fifty-two years ago. As we already stated, they continue to grow and have a very diverse revenue stream stemming from 7 different business segments. They have dominating market share in defibrillators, spinal products, and insulin pumps. As we expected (see our 1/28 blog), Medtronic is expanding their empire during tough times by agreeing to purchase companies such as CoreValve (for $700MM) and Ventor Technologies (for $325MM). These two acquisitions in particular will provide entry into the transcatheter valve industry (a less invasive procedure for valve replacement). Additionally, they continue to cut costs and have committed to return 40% of their cash flow to shareholders via dividends and stock repurchases. Not only are they buying back stock for shareholders, but management has been purchasing stock themselves in the open market. In a bleeding economy and a retiring baby boomer generation, we’re glad to own Medtronic at the cheapest P/E we’ve seen on this stock in over a decade.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | May 19, 2009 | Permalink

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