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Undervalued Medtronic Looks Like a Healthy Buy

Debbie S. Wang

Debbie Wang: One name we'd like to highlight right now is Medtronic, which has a wide economic moat, medium uncertainty, and shares are currently trading at roughly a 16% discount to our fair value estimate. This is a company that we think is particularly well-positioned to leverage the shift to value-based reimbursement and the risk-based contracts that its hospital customers are particularly interested in.

There are several reasons for this. First is the breadth of products. Medtronic covers everything from cardiac rhythm management devices to insulin pumps. So, it can cover a whole number of therapeutic areas.

Second, the company makes lot of investments into clinical trials. It's that clinical data and having a good handle on that that allows the company to figure out the way to price these risks that it will be taking on when its products do not work. At this point, we estimate roughly 4% to 6% of Medtronic's total revenue is under contract in these long-term contracts with risk sharing, including 30% of its U.S. traditional cardiac rhythm management business.

In the end, we think that this helps Medtronic insulate itself from competition, especially as Boston Scientific and Abbott launch comparable products but do not have the risk-based contracts.