The medical-device maker is in a commanding position in an expanding market. But wait for more downside.

Volatility has taken its toll on just about everyone in the past six weeks. But every downturn has the seeds of opportunity.

Many seasoned investors use such turbulent markets to add to existing positions in their best stocks or to establish new positions in great companies at attractive valuation levels.

By that score, MiniMed (Nasdaq:MNMD - news) looks quite appealing, thanks to the company's industry leadership and great growth prospects. But -- and it's a big but -- it's still too soon to chase the stock, despite a 16% drop Thursday (it's down another 4% intraday today).

While a great company, it remains a high price/earnings stock and I think the market environment will compress this multiple allowing investors to own it at even lower levels in the next three months.

MiniMed is a technology-driven medical device outfit with a commanding position in its rapidly expanding market segment. The company is primarily focused on the intensive management of diabetes, a very serious debilitating illness that has afflicted over 120 million individuals worldwide. The cost of treating this disease currently exceeds $100 billion annually and MiniMed has an array of products that can reduce the cost of treatment and vastly improve the quality of life of the afflicted.

The MiniMed Pumps
　　Approximately 16 million individuals in the US are afflicted with either Type I or Type II diabetes. MiniMed's external insulin pump treats the more serious Type I, which affects one million Americans.

MiniMed's pump, which delivers insulin as needed throughout the day, is far superior to the alternatives of conventional medicine or multiple daily injections. It provides a much more accurate dose, is less costly over the long run and is significantly more convenient to the user. In fact, the annual cost, excluding the one time $5,495 cost of the pump is $700 versus $1,200 for multiple daily injections and $2,400 for conventional approaches.

MiniMed now controls 85% of the market for infusion pumps, but there's plenty of growth left. Only 10% of all Type I diabetics use advanced infusion pumps. Much of this can be attributed to the technology adoption curve. There may soon be an inflection point in the demand curve as 60% of the users have purchased its pumps in the past three years. Tellingly, once educated on the benefits of the pump, healthcare workers and diabetics overwhelmingly support its use.

MiniMed also has more devices in the R&D pipeline, several of which should come to market in the next few years. MiniMed has spent $24 million already this year developing new products and expects R&D to remain at the 10%-12% of sales level. That should allow the company to maintain its leadership position, growth rate and profitability for the foreseeable future.

A More Natural Approach
　　An especially intriguing product: a new implantable pump that is place in the abdomen and operates for three to four months. It's more than a matter of convenience. That location allows the placement of the insulin very close to area where the pancreas would naturally deliver it. Eventually, MiniMed will marry its glucose-monitoring device with the implantable pump to create an artificial pancreas. This is a major breakthrough and one that will enable diabetes sufferers to enjoy a higher quality of life.

MiniMed also stands to benefit from the proverbial ``razor blades'' end of the business. Pump sales currently represent 60% of sales, while the consumable products account for the remaining 40%. Look for consumables to garner a greater share over time as the installed base of pumps grows. Innovations in the core pump technology should keep sales of those devices strong as well.

MiniMed hopes to expand beyond the diabetes market into areas such as pulmonary hypertension, AIDS, melanoma and general medication pumps that deliver proteins and peptides. If it can successfully leverage of the pump technology, MiniMed has the chance to become a medical device powerhouse.

Lofty Valuation
　　At its current $4.2 billion market capitalization, the company is trading at over 15 times annualized revenues, 117 times consensus 2000 and 80 times consensus 2001 analyst EPS forecasts. That lofty valuation indicates that MiniMed is no longer a well-kept secret. But if you were not fortunate enough to have owned the stock prior to January 2000, I would wait.

Why? Investors will likely continue to compress the multiples of even the great companies, which should provide an opportunity for new investors to own these shares at a more attractive forward valuation. The company posted 40% revenue growth and 64% EPS growth in the most recent quarter, which is very impressive, but at current price levels investors are really paying up for this growth.

I would feel more comfortable paying 50 times Y2001 EPS forecast which would place the target price range in the low $40's or a 30-35% correction from current levels. The risk here is that MNMD never hits my prescribed price targets, but I believe the patience will pay off

David H.M. Baker CFA is an analyst for worldlyinvestor.com and president of Rivendell Capital Management, http://www.rivendellcapital.com a private-client money management firm, and a partner in Vision Investors LP, a Boston-based hedge fund. His column covers stocks that he feels are undervalued relative to their peers. Rivendell Clients have a long position in MiniMed. Positions can change at any time.

(From Yahoo)