BUY OR SELL-Is Medtronic immune to device sector turmoil?

* Investors see quarterly results meeting expectations

* Views diverge over long-range growth prospects

By Susan Kelly

CHICAGO, Nov 18 (Reuters) - In a medical device sector rocked by profit warnings from top names, investors are looking to Medtronic Inc (MDT.N) as an island of calm.

While Boston Scientific (BSX.N) and St Jude Medical (STJ.N) shares plunged last month after both device makers issued profit warnings, Medtronic stock has notched new one-year highs ahead of the company's fiscal second-quarter earnings release next week.

"Expectations are just so low for Medtronic that I don't think they'll disappoint," said Jeff Jonas, portfolio manager for the Gabelli Health and Wellness Trust, a Medtronic shareholder.

Chris Sullivan, portfolio manager for First National Bank's First Focus Funds, which also holds Medtronic shares, also expects the company's results to meet expectations. Relief that U.S. health reform legislation is likely to include a scaled-back medical device tax is also buoying the stock, he said.

"As we get closer to health care reform, people are feeling a little bit better and not quite as skittish in looking at the valuations of these companies versus the longer-term growth potential. They are looking at health care as a relatively good place to be," Sullivan said.

Where opinions diverge, however, are over Medtronic's prospects longer term. Some see slower growth ahead for key products such as spinal implants, pacemakers and the company's top seller -- implantable cardioverter defibrillators (ICDs) that prevent fatal heart rhythms.

"WRITING'S ON THE WALL"

Wedbush analyst Phillip Nalbone, who last week began covering Medtronic with a "neutral" rating, isn't worried about the upcoming quarter either. It's the threat of accelerating pricing pressure on medical devices that concerns him.

"I have big concerns about the risks to Medtronic's financial performance over the next couple of years as these big product categories that they dominate continue to mature. We have to watch the pricing environment very closely and watch whatever happens with reform," said Nalbone.

Hospitals, which are caring for more underinsured and charity patients due to the weak economy and are anticipating federal reimbursement cutbacks, are demanding greater price concessions from device makers and other suppliers. Device makers will struggle to differentiate their products in this environment, Nalbone said.

"The writing is on the wall. It's going to get increasingly difficult in terms of pricing, utilization and all of those factors that weigh on sales and earnings," he said.

Over the next couple of years, Nalbone said, he expects Medtronic to lose more market share in its spine products unit, which has struggled against a number of smaller competitors, and hold stable in pacemakers and ICDs. Medtronic's stock, he predicted, will move sideways as a result.

PUSHING BACK ON PRICE

Jonas, the Gabelli fund manager, said he expects Medtronic to hold the line as hospitals start to push more aggressively for better pricing. "I think Medtronic will be disciplined, but I can't guarantee that," he said.

U.S. market growth for cardiac rhythm management devices such as pacemakers and ICDs has slowed to the low single digits as so many patients lost their insurance and deferred procedures, Jonas noted. But he sees Medtronic's diabetes and neuromodulation businesses picking up the slack, and the spine business bouncing back.

Sullivan, of First National Bank, said he expects Medtronic's product pipeline, which includes an MRI-safe pacemaker and new heart valve technology, to help the company gain market share beyond 2010. He thinks the stock is undervalued at about $40 currently. His price target is $47.

"Medtronic is very well positioned over the next two to three years with their product introductions that are upcoming. I fully expect Medtronic to stem the share losses and regain market share," Sullivan said. (Reporting by Susan Kelly; Editing by Tim Dobbyn)