Medtronic: Buy Hold or Sell?

Medtronic is the leading maker of medical devices, with its string of innovative products that can be powering a failed heart, or valves, and basically while I know little about medicine, the company does seem to have a good set of financial metrics worth examining further.

Medtronic (NYSE: MDT)

28Feb11

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full NYSE:MDT chart at Wikinvest

P=39.88

MDT’s FY11 ends 30Apr11.

MDT’s international revenues account for 40% of total.

EPS_11f=3.38 (source: 3q MDT)

EPS_9mths 2011=2.14

EPS_ttm=2.14+0.86=3

PER_11f=11.8x

PER_ttm=13.3x

Div_11=0.9

Divyield_11=2.25% highly supportable by RR=73%.

FCF: Using RFR=4.7, beta=0.89 and MRP=6.5, FV based on 2010 reported data=39.19, indicating Medtronic is currently priced for zero LTEG. Using the 10year bond rate of 3.4, FV=44.95, which is an upside of 13%, with PER_11f=13.3x, still not enough for the 20% margin. RP=44.95/1.2=37.46.

Examining the trailing PER, MDT had gone through a regime change, where it is now trading at rather low averages compared to the 20+ level it was trading at. On a relative basis, MDT is cheaper than even the average SP500 of 14x, but using 14*EPS_11f=47.32, that still gives only an 18.7% margin. This number also coincides with estimated FCF’s FV for 2011. MDT has had strong earnings growth with dips in 2008-2009 over the last 10 years. The economic story is strong, with global aging demographics supporting the case. I had tried to find information about a patent cliff and generics for MDT to see if it faces the same problems that pharmas do,  but I do not find such info. MDT is now at among its highest historical dividend yields.

Conclusion: RP=37.46 with 1^st TP=44.95 subject to review. MDT can benefit from a PER expansion also, which would bring the potential gains to exceeding 100% levels, but this is unlikely to happen yet.