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Medtronic Inc. recently reported its preliminary financial results based on which CapitalCube provides 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).

Medtronic Inc.'s analysis versus peers uses the following peer-set: Johnson & Johnson (JNJ), Baxter International Inc. (BAX), Stryker Corp. (SYK), Zimmer Holdings Inc. (ZMH), Edwards Lifesciences Corp. (EW), St. Jude Medical Inc. (STJ), Boston Scientific Corp. (BSX) and Owens & Minor Inc. (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. 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. Medtronic Inc.'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. currently converts every 1% of change in revenue into 6.5% of change in annual reported earnings.

Medtronic Inc.'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 Medtronic Inc.'s operations do not benefit from any differentiating pricing advantage. However, Medtronic Inc.'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

Medtronic Inc.'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.

Medtronic Inc.'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

Medtronic Inc. 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.

Medtronic Inc.'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. 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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Source: Earnings Analysis: Medtronic Inc.