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MDT

Medtronic NYSE:MDT Stock Report

Last Price

US$94.82

Market Cap

US$126.0b

7D

1.7%

1Y

-26.1%

Updated

12 Aug, 2022

Data

Company Financials +
MDT fundamental analysis
Snowflake Score
Valuation3/6
Future Growth1/6
Past Performance5/6
Financial Health5/6
Dividends5/6

MDT Stock Overview

Medtronic plc develops, manufactures, and sells device-based medical therapies to healthcare systems, physicians, clinicians, and patients worldwide.

Medtronic plc Competitors

Price History & Performance

Summary of all time highs, changes and price drops for Medtronic
Historical stock prices
Current Share PriceUS$94.82
52 Week HighUS$135.89
52 Week LowUS$86.70
Beta0.76
1 Month Change7.86%
3 Month Change-7.65%
1 Year Change-26.12%
3 Year Change-7.73%
5 Year Change13.68%
Change since IPO4,532.43%

Recent News & Updates

Aug 12

Undervalued Medtronic Sports Solid Dividend Growth Prospects

Medtronic is a global leader in medical technology. The company functions in four operating segments: Cardiac & Vascular, Minimally Invasive Therapies, Restorative Therapies, and Diabetes. It is a stellar free cash flow generator with a strong Dividend Cushion ratio, though the outlook for the company’s margin expansion opportunities has been diminished somewhat. Medtronic is a Dividend Aristocrat that has grown its payout over the past 40+ consecutive years, and we forecast that it will continue to grow its payout. Shares are trading at the low end of our fair value estimate range and boast a healthy 2.7% dividend yield supported by a 1.8 Dividend Cushion ratio. We're fans of the company. By The Valuentum Team There is not much to dislike about Medtronic plc (MDT), though recently, its business has faced headwinds in the form of supply chain hurdles, lackluster operational execution, and inflationary pressures. Medtronic remains a stellar free cash flow generator with a strong Dividend Cushion ratio, though the outlook for the company's margin expansion opportunities has been diminished somewhat. Share buybacks compete for capital against Medtronic's dividend obligations, and potential M&A activity needs to be monitored (tuck-in acquisitions are a core part of Medtronic's business model). Medtronic has a sizable total debt load, though the firm generally keeps ample liquidity on hand. Shares are trading at the low end of our fair value estimate range and boast a healthy 2.7% dividend yield supported by a 1.8 Dividend Cushion ratio. We're fans of the company. Dividend Cushion Cash Flow Bridge (Image Source: Valuentum) The Dividend Cushion Cash Flow Bridge, shown in the image above, illustrates the components of the Dividend Cushion ratio and highlights in detail the many drivers behind it. Medtronic's Dividend Cushion Cash Flow Bridge reveals that the sum of the company's 5-year expected cumulative free cash flow generation, as measured by cash flow from operations less all capital spending, plus its net cash/debt position on the balance sheet, as of the last fiscal year, is greater than the sum of the next 5 years of expected cash dividends paid. Because the Dividend Cushion ratio is forward-looking and captures the trajectory of the company's free cash flow generation and dividend growth, it reveals whether there will be a cash surplus or a cash shortfall at the end of the 5-year period, taking into consideration the leverage on the balance sheet, a key source of risk. On a fundamental basis, we believe companies that have a strong net cash position on the balance sheet and are generating a significant amount of free cash flow are better able to pay and grow their dividend over time. Firms that are buried under a mountain of debt and do not sufficiently cover their dividend with free cash flow are more at risk of a dividend cut or a suspension of growth, all else equal, in our opinion. Generally speaking, the greater the 'blue bar' to the right is in the positive, the more durable a company's dividend, and the greater the 'blue bar' to the right is in the negative, the less durable a company's dividend. In Medtronic's case, we view its dividend as quite healthy. Medtronic's Key Investment Considerations Image Source: Valuentum Medtronic is a global leader in medical technology. The company functions in four operating segments: Cardiac & Vascular, Minimally Invasive Therapies, Restorative Therapies, and Diabetes. Medtronic bought Covidien in a tax-inversion deal in 2015 through a cash-and-stock deal worth ~$42.9 billion. Medtronic traces its roots back to the late 1940s. Medtronic aims to grow its organic revenues by 5%+ per year and its adjusted EPS by 8%+ per year. Tuck-in acquisitions are a core part of its business model. Medtronic has over 49,000 patents in its portfolio and the firm continues to innovate. Medtronic's long-term free cash flow conversion target is 80%+ and historically, the company has been a stellar free cash flow generator in almost any operating environment. The firm's product pipeline remains robust, with an eye towards its 'Deep Brain Stimulation System,' pacemaker, atrial fibrillation, and pelvic health offerings. Medtronic sees emerging markets underpinning its long-term growth trajectory, which represented a relatively small but growing portion of its fiscal 2022 revenues. The firm identified three things to work on to improve its performance in these markets: channel optimization, functional capabilities, and localization. Recently, Medtronic has been facing headwinds in the form of supply chain hurdles, lackluster operational execution, and inflationary pressures. These factors, among others, weigh negatively on its ability to significantly expand its margins going forward. Though we like Medtronic's business model and competitive advantages, its most recently reported quarter in May left much to be desired as "global supply chain and COVID-19 controls in China" weighed on performance. Looking ahead, the company expects fiscal year 2023 organic revenue in the 4%-5% range and non-GAAP EPS in the range of $5.53-$5.65 per share, the latter weighed down by negative foreign currency translation. Medtronic's Economic Profit Analysis The best measure of a company's ability to create value for shareholders is expressed by comparing its return on invested capital with its weighted average cost of capital. The gap or difference between ROIC and WACC is called the firm's economic profit spread. Medtronic's 3-year historical return on invested capital (without goodwill) is 22%, which is above the estimate of its cost of capital of 9.4%. As such, we assign the firm a ValueCreation rating of EXCELLENT. In the chart below, we show the probable path of ROIC in the years ahead based on the estimated volatility of key drivers behind the measure. The solid grey line reflects the most likely outcome, in our opinion, and represents the scenario that results in our fair value estimate. Medtronic is a strong economic-value generator. Image Source: Valuentum Medtronic's Cash Flow Valuation Analysis Image Source: Valuentum We think Medtronic is worth $103 per share with a fair value range of $82.00 - $124.00. The margin of safety around our fair value estimate is driven by the firm's LOW ValueRisk rating, which is derived from an evaluation of the historical volatility of key valuation drivers and a future assessment of them. Our near-term operating forecasts, including revenue and earnings, do not differ much from consensus estimates or management guidance. Our model reflects a compound annual revenue growth rate of 4.2% during the next five years, a pace that is higher than the firm's 3-year historical compound annual growth rate of 1.2%. Our valuation model reflects a 5-year projected average operating margin of 32.2%, which is above Medtronic's trailing 3-year average. Beyond year 5, we assume free cash flow will grow at an annual rate of 1.5% for the next 15 years and 3% in perpetuity. For Medtronic, we use a 9.4% weighted average cost of capital to discount future free cash flows. Image Source: Valuentum Image Source: Valuentum Medtronic's Margin of Safety Analysis Image Source: Valuentum Our discounted cash flow process values each company on the basis of the present value of all future free cash flows. Although we estimate Medtronic's fair value at about $103 per share, every company has a range of probable fair values that's created by the uncertainty of key valuation drivers (like future revenue or earnings, for example). After all, if the future were known with certainty, we wouldn't see much volatility in the markets as stocks would trade precisely at their known fair values. This is an important way to view the markets as an iterative function of future expectations. As future expectations change, so should the company's value and its stock price. Stock prices are not a function of fixed historical data but rather act in such a way to capture future expectations within the enterprise valuation construct. This is a key part of our book Value Trap: Theory of Universal Valuation.

Jul 25
There's Been No Shortage Of Growth Recently For Medtronic's (NYSE:MDT) Returns On Capital

There's Been No Shortage Of Growth Recently For Medtronic's (NYSE:MDT) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key...

Jul 22

Don't Buy Medtronic For Its Diabetes Franchise

Medtronic is the world’s largest pure-play medical device company. It is a dividend aristocrat, conservatively financed and well diversified. It seems like a great long-term investment. The company piqued my interest because of its diabetes portfolio, however, I found that managerial missteps left Medtronic in a weak position compared to Abbott and Boston Scientific. Medtronic certainly is a good company, but I am not interested investing at this time, as I already own J&J and am considering Abbott because of its superior diabetes portfolio. Nevertheless, long-term dividend growth investors should be pleased with the stock, as management places great emphasis on growing dividends. However, European investors should take the Irish withholding tax into account, as they might not be eligible for the same exemptions as U.S. investors. Investment Thesis Many investors hold Johnson & Johnson (JNJ) because of the company's well-diversified portfolio, high profitability, excellent balance sheet, and recession-resistant business model. However, JNJ's diversification into pharmaceuticals, medical devices and healthcare products is not for everyone. Therefore, investors with a solid pharmaceutical portfolio might want to diversify via a medical device company. Medtronic plc (MDT) fits this bill very well, in my opinion, in part because the company's management is very shareholder-friendly, just like JNJ's. Both companies have decades-long track records of dividend growth. Medtronic caught my attention because of its commitment to diabetes care. With an estimated 537 million patients in 2021, diabetes unfortunately continues to be a mega-market, and the "growth trend" is not likely to abate anytime soon. In this article, I will discuss the company's portfolio, focusing on its diabetes franchise, recent growth profile, balance sheet quality, and growth prospects. Finally, I will outline whether I personally would consider investing in Medtronic, taking into account the company's current valuation. Company Overview Medtronic is the world's largest pure-play medical device company with a current (July 21, 2022) market capitalization of $120 billion and an enterprise value of approximately $134 billion. This already tells us that Medtronic is a very moderately leveraged company. Medtronic operates in more than 150 countries and is best known for its pacemakers, insulin pumps, blood glucose monitoring systems, vascular stents and cardiac catheters. Because of the critical role played by many of Medtronic's products, the company has strong pricing power. Its dominance in many areas is the primary reason for Morningstar's wide economic moat rating. Medtronic's portfolio is well diversified both in terms of business segments (Figure 1) and geographically (32% of fiscal 2022 sales in developed markets outside the U.S., 17% in emerging markets). Russia and Ukraine contribute only marginally (1%) to Medtronic's revenue. Of course, the sectors in which Medtronic operates are relatively competitive, and in terms of diabetes care and pacemakers, names like Abbott Laboratories (ABT) and Boston Scientific (BSX) come to mind. Figure 1: Medtronic’s fiscal 2022 segment sales (own work, based on the company’s fiscal 2022 10-K) MDT must constantly innovate to differentiate itself from its competitors, so it is not surprising that the company typically launches more than 100 products per year - a pace that smaller competitors in particular struggle to keep up with. In recent years, Medtronic has increasingly invested in research and development, as shown in Figure 2. The company operates in a variety of niches with its medical devices. I view this as a double-edged sword. On the one hand, the company benefits from economies of scale and is therefore able to outcompete smaller rivals. On the other hand, serving many niches with relatively small patient numbers carries the risk of losing focus, which will sooner or later be accompanied by declining profit- and cash flow margins. Figure 2: Medtronic’s research and development expenses as a percentage of net sales (own work, based on the company’s fiscal 2016 to 2022 10-Ks; note that Medtronic’s fiscal year ends in April) As mentioned earlier, Medtronic caught my interest because of its commitment to diabetes care. Unlike, for example, Novo Nordisk (NVO), the diabetes drug specialist, Medtronic is involved in the market of diabetes care devices, such as insulin pumps and blood glucose meters. The company has made substantial investments in the past, and its products target a large patient base. However, the market for diabetes treatments is, unsurprisingly, highly competitive, and Medtronic's performance in this area has been relatively disappointing in recent years. The company is struggling to compete against Abbott, the price leader, and DexCom (DXCM), the quality leader, It has even attracted the attention of the FDA, which issued a warning letter addressing the inadequacy of certain medical device quality system requirements. In addition, the FDA accused Medtronic of being slow on product recalls. The company's diabetes product sales continue to decline (3% in fiscal 2022 and 5% organically in the fourth quarter of 2022), but management expects a return to growth soon. All in all, it doesn't seem reasonable to conclude that Medtronic's diabetes segment will be a big profit contributor anytime soon. But even though Medtronic piqued my interest because of its diabetes segment, I still think the company is interesting because of its innovative nature and diversified portfolio. Profitability and Growth Over the last twenty years, Medtronic's earnings growth has been extremely consistent (see FAST Graphs chart at the end of the article). However, I have only looked in detail at the company's performance over the last seven fiscal years because Medtronic acquired Ireland's Covidien plc in 2015. Because of the timing of the acquisition (January 2015), the fiscal 2015 earnings-related numbers only partially reflect Covidien's contribution. Compared to fiscal 2014, revenue grew nearly 70% through fiscal 2016, indicating that the Covidien transaction was undoubtedly significant for Medtronic, as confirmed by the $50 billion transaction value. Since 2016, revenue growth has actually been quite weak, with a compound annual growth rate ((CAGR)) of only 1.3%. In part, the weak growth is due to Medtronic divesting businesses from time to time. For example, in 2017, the company sold its Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses to Cardinal Health (CAH) for $6.1 billion (p. 70, fiscal 2018 10-K). Near-term growth was slightly better, but still modest, at 3.5% per year, compounded, and should not be overstated due to the recovery from the pandemic. This shows that many of Medtronic's products are used in various types of elective procedures. For fiscal 2023, the company expects sales to exceed $33 billion, but a strong U.S. dollar would negatively impact earnings by about $1 billion if the current exchange rate remains stable for the remainder of the fiscal year. Figure 3: Medtronic’s net sales since fiscal 2016, the first fiscal year after the acquisition of Covidien plc (own work, based on the company’s fiscal 2016 to 2022 10-Ks; note that Medtronic’s fiscal year ends in April) Medtronic maintains a relatively consistent operating profitability in the 18% range, and the company also has strong free cash flow profitability in the high teens. While JNJ has stronger margins, ABT is pretty much in line with MDT - which is likely due to JNJ's pharma segment. In terms of free cash flow, Medtronic has a slightly higher cash flow conversion. In recent years, the company generated annualized free cash flow of $6 billion (normalized for working capital movements, stock-based compensation, and impairment charges). Medtronic's return on invested capital ((ROIC)) and cash return on invested capital ((CROIC)) are surprisingly weak (Figure 4). In fact, Medtronic has often been unable to generate returns in excess of its cost of capital (assuming a 6% equity risk premium). Of course, only ROIC should be compared to the weighted average cost of capital (WACC, which takes into account both equity and debt). CROIC, which is based on normalized free cash flow, should be compared to the cost of equity, which is inherently higher than WACC. Abbott Laboratories' returns on capital are similarly weak, while JNJ - again likely due to its pharmaceutical segment - regularly generates returns in excess of 10% above its cost of capital. Figure 4: Medtronic’s (cash) return on invested capital compared to its weighted average cost of capital, assuming an equity risk premium of 6% (own work, based on the company’s fiscal 2016 to 2022 10-Ks; note that Medtronic’s fiscal year ends in April) Both the comparatively weak (but still strong in absolute terms) margins and the low returns on capital indicate that the company is probably too diversified and lacks focus. One reason it shares with Abbott is the company's constant need for innovation and its focus on the medical device sector. Problematic working capital management could be another reason, but Medtronic's cash conversion cycle has remained remarkably stable since its acquisition of Covidien in 2015, confirming the company's proper integration, which is not a given, considering Covidien's size. Going forward, I do not think it is unreasonable to assume the company can achieve healthy growth, especially as elective surgeries will increase after being deferred during the pandemic and the company will certainly leverage its strong pricing power. Conversely, ongoing supply chain disruptions, as well as labor shortages and a strong U.S. dollar, could continue to weigh on results, at least in the near term. According to FAST Graphs, analysts expect earnings to be flat in fiscal 2023, but growth should return to the high single digits thereafter. The two-year forward analyst scorecard suggests that Medtronic's analysts know the company very well and the company has been able to deliver results in line with estimates, with the understandable exception of pandemic-shaken fiscal years 2020 and 2021 (Figure 5). Figure 5: Two-year forward analyst scorecard for Medtronic (obtained with permission from www.fastgraphs.com, Copyright FAST Graphs) Financial Stability Medtronic is a conservatively financed company, as already suggested by the relatively small gap between market capitalization and enterprise value. The company's net debt has declined from nearly $20 billion at the end of fiscal 2017 to $13.5 billion at the end of fiscal 2022. This confirms Medtronic's strong cash generation capabilities, as the company also repurchased shares and rewarded shareholders with a sizable dividend during this period. If the company were to suspend its dividend and share repurchases (which seems very unrealistic indeed), Medtronic would only need two to three years to pay off all of its debt with its cash flow. Given Medtronic's good cash flow conversion, it is not surprising that its net debt to EBITDA ratio is also very modest at typically 2x. Medtronic's debt maturity profile is also very reassuring, with more than 50% of its debt maturing after 2027 (Figure 6). Figure 6: Medtronic’s debt maturity profile at the end of fiscal 2022 (own work, based on the company’s fiscal 2022 10-K) Therefore, it does not come as a surprise that Medtronic’s long-term debt has been rated A by Standard & Poor’s at the end of fiscal 2022, which enables the company to refinance its debt at comparatively low rates. Shareholder Returns And Tax Implications Medtronic is a dividend aristocrat, and the recent 8% increase is the 45th consecutive increase. That's downright spectacular, even if behemoth JNJ carries an even stronger track record of 60 years under its belt. Over the past 45 years, Medtronic's dividend has grown at a CAGR of 16%. The way Medtronic's management puts its dividend front and center is music to my ears: We’ve increased our dividend for the past 45 years and growing our dividend is an important component of the total return we generate for our shareholders. – Geoff Martha, CEO The dividend is covered very well by free cash flow, and the company paid out approximately 50-60% in recent years. This leaves ample room for growth, even if earnings growth lags in the short-term. It should be noted that Medtronic is a company that is no longer headquartered in the U.S. since the acquisition of Irish Covidien in 2015. Since then, the company benefits from the country’s more favorable tax regime. This can have implications on the dividend, depending on the investor’s tax residence. According to the company’s fiscal 2022 10-K (p. 23 f.): Shareholders resident in the U.S. that hold their shares through DTC will not be subject to dividend withholding tax, provided the addresses of the beneficial owners of such shares in the records of the brokers holding such shares are recorded as being in the U.S. (and such brokers have further transmitted the relevant information to a qualifying intermediary appointed by us). However, other shareholders may be subject to dividend withholding tax, which could adversely affect the price of their shares.

Jul 13

Medtronic hits 52-week low; stock down 17% YTD

Medical device maker Medtronic (NYSE:MDT) hit a 52-week low of $86.81 in Wednesday trading. Year to date, shares are down 17%. Over the last year, they are down 31%. Earlier in July, Wolfe Research started Medtronic with an underperform and $55 price target (~37% downside based on Wednesday's close). Analyst Mike Polark called the stock a "potential value trap" noting its EPS CAGR over the last 10 years is ~5% and a dividend yield of ~2% over that time.

Shareholder Returns

MDTUS Medical EquipmentUS Market
7D1.7%1.0%1.3%
1Y-26.1%-20.3%-11.7%

Return vs Industry: MDT underperformed the US Medical Equipment industry which returned -20.3% over the past year.

Return vs Market: MDT underperformed the US Market which returned -11.7% over the past year.

Price Volatility

Is MDT's price volatile compared to industry and market?
MDT volatility
MDT Average Weekly Movement3.3%
Medical Equipment Industry Average Movement9.6%
Market Average Movement7.8%
10% most volatile stocks in US Market16.9%
10% least volatile stocks in US Market3.2%

Stable Share Price: MDT is less volatile than 75% of US stocks over the past 3 months, typically moving +/- 3% a week.

Volatility Over Time: MDT's weekly volatility (3%) has been stable over the past year.

About the Company

FoundedEmployeesCEOWebsite
194995,000Geoff Marthahttps://www.medtronic.com

Medtronic plc develops, manufactures, and sells device-based medical therapies to healthcare systems, physicians, clinicians, and patients worldwide. Its Cardiovascular Portfolio segment offers implantable cardiac pacemakers, cardioverter defibrillators, and cardiac resynchronization therapy devices; cardiac ablation products; insertable cardiac monitor systems; TYRX products; and remote monitoring and patient-centered software. It also provides aortic valves, surgical valve replacement and repair products, endovascular stent grafts and accessories, and transcatheter pulmonary valves; and percutaneous coronary intervention products, percutaneous angioplasty balloons, and products.

Medtronic plc Fundamentals Summary

How do Medtronic's earnings and revenue compare to its market cap?
MDT fundamental statistics
Market CapUS$125.99b
Earnings (TTM)US$5.04b
Revenue (TTM)US$31.69b

25.0x

P/E Ratio

4.0x

P/S Ratio

Earnings & Revenue

Key profitability statistics from the latest earnings report
MDT income statement (TTM)
RevenueUS$31.69b
Cost of RevenueUS$10.03b
Gross ProfitUS$21.66b
Other ExpensesUS$16.62b
EarningsUS$5.04b

Last Reported Earnings

Apr 29, 2022

Next Earnings Date

Aug 23, 2022

Earnings per share (EPS)3.79
Gross Margin68.35%
Net Profit Margin15.90%
Debt/Equity Ratio45.6%

How did MDT perform over the long term?

See historical performance and comparison

Dividends

2.9%

Current Dividend Yield

67%

Payout Ratio