MDT buys Kyphon

My first reaction to this deal was that I need to sell MDT -- if they need to do a deal like this then their growth prospects are worse than I thought. My latest reaction is that I don't have to panic but my bar for finding a better opportunity is lower than it used to be for MDT. BTW, that is what portfolio management is about -- opportunity costs. Its about making sure that your portfolio has the best names that it can have on a secular basis. That means I am not switching just to get a minor improvement in but in MDT's case its not as fast a grower as I thought.

One look through the 291 slides from the recent analyst meeting helped my thinking -- this is a 10% grower not a 15% grower. The stock has had a tough time since it peaked in 2000 -- 7 years and its at $50 -- no movement in 7 years. I bought in 2001 at $40 so I have made some money but that is only on about half of my shares -- the rest were bought in the last couple of years at $48-52. First the stock was at a ridiculous multiple in 2001 -- over 40X earnings. That was way too high for the future growth potential of mid teens.

The company hit its mid teens growth numbers for the next several years -- yet all that happened is the earnings caught up with the stock (valuation multiple dropped). Now just when the valuation is reasonable the growth drivers have been falling away one by one. First we lost the ICD's -- Guidant's safety issues has caused too many patients to have second thoughts about getting an ICD despite the fact that its a life saving device. What was supposed to be a 20% grower (and the biggest driver of results given its 25% of revenues) is now a 10% grower IF the international side grows 20% to offset the US's puny 6-8% growth.

Stents -- too many issues about safety and efficacy -- it is no longer a growth market. This was once considered the main growth driver for 2008 and 2009.

Spinal -- Medtronic was supposed to be able to compete against Kyphon but now they have thrown in the towel and decided to buy them. I would prefer they were able to compete against them -- the fact that they can't doesn't say much for MDT's R&D as well as marketing/sales in the spinal area.

Its still a great company and they are doing everything they can to manage through the issues and come up with more growth drivers but all the good stuff is years away. I think for me the stock is a source of cash -- I will sell half the position and then it will be the right size for its potential.