Call Options Or Put Options On Medtronic (MDT)?

| February 20, 2013 | 0 Comments

MDT OptionsMedtronic (MDT) is one the largest medical device makers in the world.  Their products are used to diagnose, treat, and manage numerous health conditions. 

MDT currently trades for $44.48 per share.  The shares are up 27% from the 52-week low of $35.00 but the shares are down 6% since reporting quarterly earnings earlier this week. 

Is this an opportunity to buy call options after a strong third quarter?  Or should you buy put options on MDT as problems in Europe pile up?

The bulls make a convincing argument…

Medtronic is coming off a strong quarter.  They improved the top and bottom line since the same quarter last year.  Revenue grew 3% to just over $4 billion and earnings grew 6% from 88 cents per share to 97 cents per share.

Management also reiterated their previous revenue and earnings per share guidance.  So it appears MDT is on track to grow revenue 3% to 4% in fiscal 2013 and full year earnings will come in around $3.66 to $3.70.

That’s a solid quarter and bullish outlook for a $46 billion company in the healthcare industry.

What’s more, the recent pullback in MDT looks like a good entry point.  The post-earnings selloff has pushed MDT down to support around $44.  This support zone comes from the high it set back in October. 

Don’t forget, once an old resistance has been broken, it becomes a new support.  I think we’ll see MDT get a nice bounce off this technical level and make a run at the 52-week high.

But the bears have a compelling case as well… 

MDT had a solid quarter and management tried to stay upbeat.  But they couldn’t deny problems in Europe are troubling.

First off, European sales dropped 1% last quarter.  A big shortfall compared to the 2% to 3% they had been growing at in previous quarters.  This is a clear indication the recession in Europe is cutting into the amount of money Europeans are spending on healthcare. 

To make matter worse, management indicated the majority of the slowdown in European sales came in January.  So the problems will likely persist into next quarter’s earnings as well. 

Simply put, if MDT doesn’t fix the problems in Europe quickly, they’ll be looking at coming up short of estimates next quarter.  And that’s never good for a stock’s price.

Additionally, the European Commission has proposed new regulations on medical devices sold in Europe.  If these new regulations are enacted, it could completely derail MDT’s already struggling European sales.  That’s an ugly combination that will likely send MDT shares tumbling lower in the weeks ahead. 

If you think the bulls are right, take a look at buying the MDT April 2013 $45.00 calls for around $1.14.

If you think the bears are right, take a look at buying the MDT April 2013 $44.00 puts for around $1.21.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.