Medtronic Expands in China - Analyst Blog
01 Octobre 2012 - 7:45PM
Zacks
Recently, the medical device
players have shifted focus towards emerging markets, especially
China. Medtronic (MDT), in line with this
strategy, has decided to acquire China Kanghui
Holdings (KH) for $816 million in cash. After taking into
account Kanghui's cash balance, the transaction value came in at
$755 million. This deal would strengthen Medtronic’s orthopedic
franchise in the fast growing Chinese market by bringing in trauma,
spine and joint reconstruction products.
The transaction, expected to close
in the next few months, is subject to certain approvals.
Medtronic expects that the deal would not impact its earnings
in both fiscal 2013 and 2014 as the company intends to offset any
dilutive impact of the transaction.
The proposed acquisition of China
Kanghui is in sync with Medtronic’s focus on globalization due to
the opportunity rife in international destinations, especially in
the emerging markets. Emerging markets remain a key focus area for
the company. Management is targeting to achieve 20% of its revenues
from the emerging markets by fiscal 2015−16 that will result in
additional 300–500 basis points of revenue growth.
Healthcare, which is increasingly
becoming a government priority in many emerging countries, along
with a rise in economic standards in these regions, speaks for the
immense potential for growth. It is expected that within the next
decade, China will be the biggest health care market in the world,
outpacing the US. However, revenues from this region during the
last reported quarter increased 14% (at constant currency) but
missed the company’s targeted growth rate of 20%.
Meanwhile, in August 2012,
Medtronic inaugurated its Innovation Center in Shanghai, the first
outside the US and Europe, to enhance local product research and
development in that region. This center will collaborate with the
global teams, local physicians, universities and research
institutes to provide solutions for patients. Based on these
initiatives, we expect this region to play a significant role in
the growth path of the company.
Recommendation
Medtronic is focusing on the
emerging markets primarily to offset the hindrances it faces in two
of its largest markets – US defibrillators and US spinal implants.
We are also encouraged by the company’s portfolio expansion
strategies though their contributions are not significant enough to
drive top-line growth yet. However, unfavorable currency and
macroeconomic uncertainties in Southern Europe adversely affected
sales during the first quarter. These headwinds have also affected
the company’s peers St Jude Medical (STJ) and
Boston Scientific (BSX).
We have a ‘Neutral’ recommendation
on Medtronic. The stock retains a Zacks #3 Rank (Hold) in the short
term.
BOSTON SCIENTIF (BSX): Free Stock Analysis Report
CHINA KANGH-ADR (KH): Free Stock Analysis Report
MEDTRONIC (MDT): Free Stock Analysis Report
ST JUDE MEDICAL (STJ): Free Stock Analysis Report
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China Kanghui Holdings American Depositary Shares (Each Representing Six Ordinary Shares, $0.001 Par Value) (NYSE:KH)
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China Kanghui Holdings American Depositary Shares (Each Representing Six Ordinary Shares, $0.001 Par Value) (NYSE:KH)
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