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Super-Wide Moat in the Making at Medtronic

Debbie S. Wang

Debbie Wang: Medtronic (MDT) is one of our favorite wide-moat firms in the medical-technology arena. It's the largest pure-play business in medical devices. So, it has a leadership position in key therapeutic areas like cardiac-rhythm management and spine and structural heart.

This company also creates a lot of cash flow, and so what it likes to do is invest that into emerging technologies, which sets up this company for a lot of potential in the future. The biggest news recently for Medtronic is that it is going to be buying Covidien (COV), which is also a wide-moat company. You put the two wide moats together, and you end up with a super-wide-moat company.

Covidien is dominant in the surgical suite, where they make a lot of consumables for surgical procedures. Medtronic is dominant in the medical-device arena. So, they have very complementary product portfolios. And because they're going to end up with a very broad product portfolio, this is going to make Medtronic an extremely attractive partner to negotiate with from the hospital's standpoint, because the hospital can pretty much buy anything that they need from this combined company.

One word on valuation here: Our fair value estimate on Medtronic is $63; that is right around where the shares are trading at this point. So, we don't see this necessarily as a great bargain. However, it is fairly priced. And especially for long-term investors who are interested in the dividend, Medtronic does pay a nice dividend, and it's a very high-quality company to own.