-Medtronic Inc. (
), is a global medical technology company.
-Five year average revenue growth: 9%
-Five year average earnings growth: 11%
-Five year dividend growth: 19%
-Current dividend yield: 2.70%
-I find the company stock attractive at the current price, with a
P/E of under 11.
Founded in 1949, Medtronic, Inc. is a medical technology company
focusing on alleviating pain, restoring health, and extending life
for people all over the world. With over 40,000 employees and a
market capitalization of over $35 billion, Medtronic is the world's
largest independent medical technology company.
More than 40 percent of company revenue comes from outside of
the United States. The company markets its products in over 120
The company is divided into seven operating segments. It's worth
noting that between 2009 and 2010, all seven segments reported an
increase in revenue.
Cardiac Rhythm Disease Management
This segment accounts for $5.268 billion in sales for 2010, which
represents 33% of total Medtronic company sales. Sales growth of
this segment was 5% for this year. Products in this segment include
pacemakers, implantable defibrillators, leads and delivery systems,
ablation products, electrophysiology catheters, and other
This segment accounts for $3.500 billion in sales, which represents
22% of total sales. Sales growth of this segment was 3% for this
year. Products in this segment include thoracolumbar, cervical,
neuromonitoring, surgical access, and more.
This segment accounts for $2.864 billion in sales, which represents
18% of total sales. Sales growth of this segment for this year was
18%. Products include coronary stents, delivery systems, heart
valve replacement systems, and more.
This segment accounts for $1.560 billion in sales, which represents
10% of total sales. Sales growth of this segment for this year was
9%. Products include implantable systems for treatment of chronic
pain and movement disorders, among other things.
This segment accounts for $1.237 billion in sales, which represents
8% of total sales. Sales growth of this segment for this year was
11%. Products include insulin pumps and disposable products.
This segment accounts for $963 million in sales, which represents
6% of total sales. Sales growth of this segment for this year was
12%. Products of this segment are used to treat ear, nose, and
This segment accounts for $425 million in sales, which represents
3% of total sales. Sales growth of this segment for this year was
24%. Products in this segment include defibrillators and monitoring
Of total Medtronic 2010 company sales, $6.451 billion came from
outside of the United States. This represents 41% of total
Medtronic company sales. This number is an increase of nearly 15%
compared to 2009 international revenue of $5.612 billion
Revenue, Earnings, Cash Flow, and Margin
The company has an impressive and consistent growth record.
Over this five year time period, Medtronic has grown revenue by
over 9% annually on average.
Over this period, Medtronic has grown net income by over 11%
annually, on average. Costs of acquisitions, restructuring, and
litigation have made earnings a bit erratic.
Operating Activity Cash Flow Growth
Over this five year time period, cash flow has grown by an
average of 8% per year on average. 2005 was a high year for cash
flow, and that skews the growth figures down for this five year
period. If the cash flow growth is calculated over the four year
period from 2006 through 2010 instead, then the annual cash flow
growth is calculated to be 17%. The huge difference between
calculating cash flow over different but very similar periods shows
that one must be careful when estimating growth.
Together, the cash flow growth and the earnings growth show the
growing profitability of this company. Cash flow was a bit erratic
in 2006 while earnings growth was very strong. In contrast, over
the 2008-2009 period, earnings were a bit erratic while cash flow
growth was very strong.
MDT's net profit margin is approximately 20%. Return on Equity
(ROE) is over 21% and Return on Investment ((
)) is over 14%.
In comparison, medical device maker Becton Dickinson (
), has a profit margin of approximately 16%, ROE of over 21%, and
ROI of over 17%. Medtronic has the stronger margin while Becton
Dickinson has the stronger returns on equity and investment (BDX
obtains the same ROE with less leverage).
Medtronic currently has a dividend yield of 2.70% and has a
solid record of consecutive dividend increases.
Over this five year period, Medtronic has grown its dividend by
nearly 19% per year on average. This is a fairly exceptional
dividend growth rate. During the most recent period between 2009
and 2010, the dividend payment per quarter grew by approximately
10%. The dividend payout ratio is currently a low 27%, so there is
plenty of room to continue growing the dividend into the
Looking at historical dividend yields, this company was quite
overvalued in the past. Indeed, throughout the past decade,
Medtronic has had a high P/E and therefore a low dividend
Medtronic has a moderately strong balance sheet, with a current
ratio of 1.80 and a total debt to equity ratio of 0.72.
Looking at Medtronic's numbers, one would have trouble
determining whether there even was a recession, when it occurred,
for how long, and what its magnitude was. Revenue and corresponding
cost of goods sold has grown like clockwork. Earnings growth has
been substantial as well, but somewhat erratic due to timing of
acquisitions and litigation.
Medtronic focuses on two main segments: developed countries and
emerging markets. In developed countries, Medtronic focuses on
cutting-edge innovation to increase the options of medicine to
higher levels, while in emerging markets the focus is on building
distribution, training, education, and other healthcare
In foster innovation, Medtronic has an internal venturing
program called the Quest program. In the Quest program, employees
apply for Quest grants, and a team of senior employees reviews the
applications and determine which projects will receive up to
$50,000 in initial internal funding. 165 grants have been awarded
since 1989, and 25% of them eventually become a project or a part
In fiscal year 2010, the company launched several new products
including a low-glucose suspend insulin pump, a pacemaker designed
to better endure an MRI, a new treatment for rhinosinusitis, and
many more. More than 60 new products are planned to be launched
around the world over the next two years.
To reach emerging markets, Medtronic forms partnerships with
local businesses. Medtronic formed a partnership with China's
leading manufacturer of medical devices, Weigao, to get access to
thousands of Chinese spinal surgery patients. Medtronic gains by
increasing their global reach and local knowledge, while Weigao
gets increased international recognition and increased technical
Medtronic has been a highly valued stock throughout the decade.
Currently, the company has a P/E of under 11 despite the good
growth prospects, increasing dividend payments, and a fairly clean
balance sheet. In August, Medtronic reported that high unemployment
and insurance costs have resulted in fewer people going to the
doctor, and therefore fewer people using Medtronic devices. The
company then cut its 2011 revenue growth projections down from 5-8%
to 2-5%. Medtronic stock fell 10% that day. Medtronic stock has
generally been falling throughout 2010. I don't know what the
market will do in the short term, but I think that the current
stock valuation is undervaluing the company. Market overreaction
and uncertainty give value investors great opportunities to buy
shares of some of the best companies around.
Medical devices should be in global demand over the next several
decades as more and more people in emerging markets have access to
them. Medtronic's fast international revenue growth showcases this
Like any company, Medtronic faces risk. The business faces
regulatory risks and device approval risks, commodity cost risk,
political risk, and currency risk. Since the company develops
complex products for millions of people worldwide, innovation and
new product development is important and reliant on beneficial
research and development. In addition to this, due to the
complexity and reach of their products, and the fact that they
drastically affect patient lives, MDT faces various litigation
Conclusion and Valuation
In conclusion, I find Medtronic stock to be attractive at
current prices. It's got a great growth history and great future
prospects. The valuation is quite low with a P/E of under 11. This
company was overvalued for a while, and now that the sheen has worn
off, the market is left with a great company that is undervalued.
Its revenue growth and dividend growth won't be quite as high as
previous years, but should be substantial, and higher than the
valuation would imply.
: I do not have any position in MDT at the time of this writing,
but it's on my buy list.
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