Medtronic Inc. recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visitwww.capitalcube.com.
Medtronic Inc.’s analysis versus peers uses the following peer-set: Johnson & Johnson (NYSE:JNJ), Baxter International Inc. (NYSE:BAX), Stryker Corporation (NYSE:SYK), Zimmer Holdings, Inc. (NYSE:ZMH), Edwards Lifesciences Corp (NYSE:EW), St. Jude Medical, Inc. (NYSE:STJ), Boston Scientific Corporation (NYSE:BSX) and Owens & Minor, Inc. (NYSE:OMI). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Quarterly (USD million) |
2012-10-31 |
2012-07-31 |
2012-04-30 |
2012-01-31 |
2011-10-31 |
| Revenues |
4,095.0 |
4,008.0 |
4,297.0 |
3,918.0 |
4,132.0 |
| Revenue Growth % |
2.2 |
(6.7) |
9.7 |
(5.2) |
2.0 |
| Net Income |
646.0 |
864.0 |
888.0 |
845.0 |
871.0 |
| Net Income Growth % |
(25.2) |
(2.7) |
5.1 |
(3.0) |
6.1 |
| Net Margin % |
15.8 |
21.6 |
20.7 |
21.6 |
21.1 |
| ROE % (Annualized) |
15.0 |
20.1 |
20.7 |
19.9 |
21.1 |
| ROA % (Annualized) |
7.7 |
10.4 |
10.9 |
10.6 |
11.1 |
Valuation Drivers
Medtronic Inc. currently trades at a higher Price/Book ratio (2.6) than its peer median (1.9). The market expects Medtronic, Inc. (NYSE:MDT) to grow at about the same rate as its chosen peers (PE of 13.2 compared to peer median of 16.3) and to maintain the peer median return (ROE of 19.1%) it currently generates.
The company attempts to achieve high profit margins (currently 19.9% vs. peer median of 14.6%) through differentiated products. It currently operates with peer median asset turns of 0.5x. MDT-US’s net margin has declined 1.2 percentage points from last year’s high but remains above its five-year average net margin of 18.3.
Economic Moat
The company’s revenues performance is worse than its peer median (year-on-year change revenue of 1.6%) but its earnings have been relatively good — annual earnings changed by 10.3% compared to the peer median of 8.6%, implying that relative to peers, it is focused on earnings and/or selective about what top-line growth opportunities it pursues. Medtronic, Inc. (NYSE:MDT) currently converts every 1% of change in revenue into 6.5% of change in annual reported earnings.
MDT-US’s return on assets currently is around peer median (9.9% vs. peer median 8.9%) — similar to its returns over the past five years (10.7% vs. peer median 10.7%). This performance suggests that the company has no specific competitive advantages relative to its peers.
The company’s gross margin of 78.6% is around peer median suggesting that MDT-US’s operations do not benefit from any differentiating pricing advantage. However, Medtronic, Inc. (NYSE:MDT)’s pre-tax margin is more than the peer median (24.7% compared to 18.6%) suggesting relatively tight control on operating costs.
Growth & Investment Strategy
MDT-US’s revenues have grown at about the same rate as its peers (3.5% vs. 4.0% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 13.2. The historical performance and long-term growth expectations for the company are largely in sync.
MDT-US’s annualized rate of change in capital of 11.3% over the past three years is around its peer median of 11.3%. This median investment has likewise generated a peer median return on capital of 13.0% averaged over the same three years. This median return on investment implies that company is investing appropriately.
Earnings Quality
MDT-US has reported relatively strong net income margin for the last twelve months (19.9% vs. peer median of 14.6%). This strong margin performance was accompanied by a level of accruals that was around peer median (7.1% vs. peer median of 7.1%) suggesting that the reported net income is supported by a reasonable level of accruals.
MDT-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.
Trend Charts
Company Profile
Medtronic, Inc. is a medical technology company, which provides innovative products and therapies for use by medical professionals to meet the health care needs of their patients. Its primary products include those for cardiac rhythm disorders, cardiovascular disease, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, diabetes, and ear, nose, and throat conditions. The company operates through two business segments: Cardiac & Vascular Group and Restorative Therapies Group. The Cardiac and Vascular Group segment operates through two businesses: Cardiac Rhythm Disease Management and CardioVascular. The Cardiac Rhythm Disease Management business develops, manufactures, and markets products for the diagnosis, treatment, and management of heart rhythm disorders and heart failure, including implantable devices, leads and delivery systems, products for the treatment of atrial fibrillation, and information systems for the management of patients with cardiac rhythm disease management devices. The CardioVascular business operates through three businesses: Coronary, Endovascular & Peripheral, and Structural Heart. The Coronary business comprises of therapies to treat coronary artery disease and hypertension. Its products contained within this business include coronary stents and related delivery systems, along with a broad line of balloon angioplasty catheters, guide catheters, guidewires, diagnostic catheters, and accessories. The Endovascular & Peripheral business comprises of a comprehensive line of products and therapies to treat abdominal and thoracic aortic aneurysms and peripheral vascular disease. Its products include endovascular stent graft systems, embolic protection systems, and stent systems for the treatment of narrowed iliac arteries. The Structural Heart business offers a comprehensive line of products and therapies to treat a variety of heart valve disorders. Its products are used for the repair and replacement of heart valves, perfusion systems, positioning and stabilization systems for beating heart revascularization surgery, and surgical ablation products. The Restorative Therapies Group segment operates through four businesses: Spinal, Neuromodulation, Diabetes and Surgical Technologies. The Spinal business develops, manufactures, and markets a comprehensive line of medical devices and implants used in the treatment of the spine and the musculoskeletal system. Its products and therapies treat a variety of conditions affecting the spine, including degenerative disc disease, spinal deformity, spinal tumors, fractures of the spine, and stenosis. The Neuromodulation business develops, manufactures, and markets medical devices for the treatment of chronic pain, movement disorders, psychological disorders, and urological and gastroenterological disorders. The Diabetes business develops, manufactures, and markets advanced, integrated diabetes management solutions that include insulin pump therapy, continuous glucose monitoring systems, and therapy management software. The Surgical Technologies business develops, manufactures, and markets products and therapies to treat diseases and conditions of the ear, nose, and throat and certain neurological disorders. In addition, the business develops, manufactures, and markets image-guided surgery and intra-operative imaging systems that facilitate surgical planning during precision cranial, spinal, sinus, and orthopedic surgeries. Medtronic was founded by Earl E. Bakken and Palmer J. Hermundslie on April 29, 1949 and is headquartered in Minneapolis, MN.
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