BUSINESS
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.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to be above the cost of capital, MDT is expected to continue to be a major Value Builder.
Medtronic has a current Value Trend Rating of D (Negative).
This rating combines highly consistent signals from two proprietary PTR measures of a stock’s attractiveness. Medtronic has a neutral Power Rating of 44 and a neutral Appreciation Score of 41, and the Negative Value Trend Rating results.
Medtronic’s stock is selling below targeted value. The current stock price of $83.41 compares to targeted value 12 months forward of $96.
This neutral appreciation potential results in an appreciation score of 41 (59% of the universe has greater appreciation potential.)
Medtronic has a Power Rating of 44. (This neutral Power Rating indicates that MDT’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: the Electromedical Apparatus comparison group is currently in an unfavorable position; and recent price action has been neutral. An offsetting factor is earnings estimate behavior for MDT has been slightly favorable recently.
INVESTMENT PROFILE
MDT’s financial strength is high. Financial strength rating is 82.
Relative to the S&P 500 Composite, Medtronic PLC has moderate Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that MDT is lower risk. Relative weaknesses include: low historical profitability, low expected growth, and low historical growth. MDT’s valuation is moderate: high dividend yield, moderate P/E ratio, and moderate price/book ratio. MDT has unusually high market capitalization.
CURRENT SIGNALS
Medtronic’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.
Medtronic’s current technical position is mixed. The stock price is in a 3.3 month up move. The stock has appreciated 26.2% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average. The 200 day moving average has just turned down.
ALERTS
Recent extremely meaningful negative changes in investment behavior have impacted Medtronic PLC (NYSE: MDT): its longer term price trend turned down, its shorter term price trend turned down, and negative upside/downside volume developed.
Recent small positive changes in fundamentals have benefitted Medtronic PLC (NYSE: MDT): significant quarterly earnings acceleration occurred.
The stock is currently rated D.
Medtronic PLC (NYSE: MDT) stock declined slightly by -0.7% on 3/21/24. The stock closed at $83.41. Trading volume in this decline was normal. The stock has performed in line with the market over the last nine months and has declined -2.0% during the last week.
CASH FLOW
In 2023, Medtronic PLC experienced a significant decline in cash of -$2,615 million (-25%). Sources of cash were lower than uses. Cash generated from 2023 EBITDA totaled +$8,950 million. Non-operating uses consumed -$332 million (-4% of EBITDA). Cash taxes consumed -$1,756 million (-20% of EBITDA). Re-investment in the business amounted to -$4,497 million (-50% of EBITDA). On a net basis, debt investors withdrew -$154 million (-2% of EBITDA) while equity investors pulled out -$4,826 million (-54% of EBITDA).
Medtronic PLC’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Medtronic Plc Peer Group as well. (Since 2021 Non-operating Income, %EBITDA has experienced very sharp improvement.) In most years, Medtronic PLC was in the third quartile and lower quartile. Currently, Medtronic PLC is below median at -4% of EBITDA (-$332 million).
Medtronic PLC’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Medtronic Plc Peer Group. (Since 2020 Cash Taxes, %EBITDA has accelerated sharply.) In most years, Medtronic PLC was in the top quartile and third quartile. Currently, Medtronic PLC is substantially below median at -20% of EBITDA (-$1,756 million).
Medtronic PLC’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Medtronic Plc Peer Group. In most years, Medtronic PLC was in the top quartile and second quartile. Currently, Medtronic PLC is substantially below median at -50% of EBITDA (-$4,497 million).
Medtronic PLC’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Medtronic Plc Peer Group. In most years, Medtronic PLC was in the third quartile and top quartile. Currently, Medtronic PLC is upper quartile at -2% of EBITDA (-$154 million).
Medtronic PLC’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Medtronic Plc Peer Group. (Since 2021 Equity Investors, %EBITDA has decelerated very sharply.) In most years, Medtronic PLC was in the third quartile and top quartile. Currently, Medtronic PLC is substantially below median at -54% of EBITDA (-$4,826 million).
Medtronic PLC’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Medtronic Plc Peer Group. (Since 2020 Change in Cash, %EBITDA has accelerated sharply.) In most years, Medtronic PLC was in the top quartile and lower quartile. Currently, Medtronic PLC is lower quartile at -29% of EBITDA (-$2,615 million).
Medtronic PLC’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Medtronic Plc Peer Group. In most years, Medtronic PLC was in the top quartile. Currently, Medtronic PLC is substantially above median at +25%.
PROFITABILITY
Medtronic PLC’s return on equity has eroded slightly since 2014. The current level of 8.1% is 1.61X the low for the period and is -48.5% from the high.
This slight erosion was due to little change in pretax operating return and very small negative trend in non-operating factors.
The productivity of Medtronic PLC’s assets rose over the full period 2014-2024: asset turnover has exhibited a volatile overall uptrend.
Partially offsetting this trend, however, pretax margin has experienced a downtrend but it experienced a very sharp recovery after the 2021 low.
Non-operating factors (income taxes and financial leverage) had a very small negative influence on return on equity.
Medtronic PLC’s return on equity is at the lower quartile (8.1%) for the four quarters ended January, 2024.
Operating performance (pretax return on assets) is substantially below median (6.1%) reflecting asset turnover that is lower quartile (0.36X) and at median pretax margin (17.1%).
Tax “keep” rate (income tax management) is at median (75.9%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is at the lower quartile (1.75X).
GROWTH RATES
There are no significant differences between Medtronic PLC’s longer term growth and growth in recent years.
Medtronic PLC’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 3.9% per year.
Total asset growth has been 2.1% per year.
Annual E.P.S. growth has been 4.4% per year.
Equity growth has been 3.5% per year.
Medtronic PLC’s consensus growth rate forecast (average of Wall Street analysts) is 5.2% — in line with the average of the historical growth measures.
Relative to the Medtronic Plc Peer Group, Medtronic PLC’s historical growth measures are erratic. Revenue growth (3.9%) has been slightly above median. Equity growth (3.5%) has been at median. E.P.S. growth (4.4%) has been below median. Total asset growth (2.1%) has been below median.
Consensus growth forecast (5.2%) is lower quartile.
PRICE HISTORY
Over the full time period, Medtronic PLC’s stock price performance has been below market. Between May, 2013 and March, 2024, Medtronic PLC’s stock price rose +64%; relative to the market, this was a -49% loss.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 4.1% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 4.1% is lower quartile relative to Medtronic PLC Peer Group.
Current 5-year total return performance of 0.9% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of 0.9% relative to S&P 500 Composite, Medtronic PLC’s total return performance is lower quartile relative to Medtronic PLC Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, MDT’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is slightly above median. Price/earnings ratio is slightly above median. Ratio of enterprise value/assets is slightly below median. Ratio of enterprise value/earnings before interest and taxes is below median. The lowest factor, the price/equity ratio, is near the lower quartile.
Relative to Medtronic PLC Peer Group, MDT’s overall valuation is low. The highest factor, the price/earnings ratio, is at median. Ratio of enterprise value/earnings before interest and taxes is below median. Ratio of enterprise value/revenue is below median. Ratio of enterprise value/assets is below median. The lowest factor, the price/equity ratio, is near the lower quartile.
Medtronic PLC has a very large value gap compared to the median valuation. For MDT to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 4.21X to 5.21X. If MDT’s ratio of enterprise value/revenue were to rise to 5.21X, its stock price would be lower by $24 to $108.
For MDT to hit lower quartile valuation relative to the Medtronic PLC Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 4.21X to 2.30X. If MDT’s ratio of enterprise value/revenue were to fall to 2.30X, its stock price would decline by $-46 from the current level of $83.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to be above the cost of capital, MDT is expected to continue to be a major Value Builder.
Medtronic PLC’s current Price Target of $96 represents a +15% change from the current price of $83.41.
This neutral appreciation potential results in an appreciation score of 41 (59% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 41, the neutral Power Rating of 44 contributes to an Value Trend Rating of D.
Medtronic PLC’s current Price Target is $96 (-5% from the 2023 Target of $101 but +15% from the 03/21/24 price of $83.41). This plateau in the Target is the result of a -1% decrease in the equity base and a -4% decrease in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a large positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted increase in cost of equity has a large negative impact.
PTR’s return on equity forecast is 14.4% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is well above the 2016 low of 8%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2015 and 2023. The current forecast is significantly below the 2017 peak of 23%.
PTR’s cost of equity forecast is 6.1% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic decline between 2015 and 2023. The current forecast is steady at the 2016 low of 4.2%.
At Medtronic PLC’s current price of $83.41, investors are placing a negative value of $-40 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 12.7% versus a cost of equity of 5.2%.
PTR’s 2025 Price Target of $96 is based on these forecasts and reflects an estimated value of existing assets of $94 and a value of future investments of $2.
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