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Shares of Medtronic (MDT) continue to see more upside in a year which has been really good so far for shareholders. Adding to the momentum is a bullish research report from analysts at Deutsche Bank, citing more room for earnings growth, to be accompanied by a higher valuation.

After the significant momentum, I think it is time to become slightly more cautious. I continue to like Medtronic's long-term growth prospects, yet I would remain on the sidelines at current levels.

Deutsche's Upgrade

Analysts at Deutsche Bank upgraded Medtronic from "Hold" to "Buy," while raising the price target by ten dollars to $66 per share. The increased price target shows some 15% potential compared to Friday's closing price.

Analyst Kristen Stewart notes that Medtronic has seen growth challenges, partially due to the company itself and partially on the back of difficult market circumstances.

Yet Stewart notes that Medtronic has improved on execution and has been meeting its own goals. Several catalysts could boost shareholder confidence in the next year.

Without specifying these catalysts, Stewart believes Medtronic could accelerate top line growth and deliver on high single digit EPS growth. This should be accompanied by price-earnings multiples expansion and upside to longer-term earnings estimates.

Valuation

Medtronic ended first quarter of its fiscal 2014 with $11.40 billion in cash and equivalents. Total debt stands at $11.18 billion, for essentially a flat net cash position. Note that the company is scheduled to release its second quarter earnings on the 19th of November.

The company reported full year revenues of $16.59 billion for its fiscal 2013, up 2.5% on the year before. Net earnings fell by 4.1% to $3.47 billion.

Trading around $57 per share, the market values Medtronic at $57 billion. This values the company at 3.4 times annual revenues and 16-17 times annual earnings.

Medtronic currently pays a quarterly dividend of $0.28 per share, for an annual dividend yield of 1.9%.

Some Historical Perspective

Long-term shareholders in Medtronic have seen mediocre returns. Between 2004 and 2007, shares have mostly traded in a $45-$55 trading range, to fall to lows of just $25 in 2009. In recent years, shares have seen a steady uptrend, and after witnessing year to date returns of 40%, they are currently trading around year highs.

Between the fiscal 2010 and 2013, Medtronic has reported cumulative revenue growth of 8% to $16.6 billion. Earnings rose by 12% to $3.5 billion, as earnings per share growth saw an extra boost as the company retired roughly 10% of its shares outstanding.

Investment Thesis

Shares of Medtronic have finally seen some decent upside over the past year driven by improving operational trends, combined with an increased pace of share repurchases.

Combining all of this with well diversified operations and a relative solid presence in emerging markets and it was bound to happen that shares of Medtronic saw some outperformance after shareholders have seen poor returns over the past decade.

Over the past year the firm announced interesting deals, including the acquisition of China Kanghui, announced in October of last year. Note that these deals don't come cheap, as Medtronic paid some $816 million for Kanghui. This has been paid for a firm generating annual revenues of just $52.1 million in 2011.

Yet these deals, and a recent FDA approval for MiniMed 530G, among others, offer appeal for the long-term performance of the shares, boosting the organic sales growth potential of the firm.

Back in November of 2012, I last took a look at Medtronic's prospects. At the time shares were trading in their low forties as I concluded that the long-term prospects for Medtronic remain good. Shares were appealing at the time given the modest earnings multiple and the decent dividend yield.

At the time I concluded by saying that I would expect shares to trade in their fifties by 2013. The solid 38% returns over the past year have pushed shares up toward $57 at the time of writing. These share price returns have pushed up the valuation to about 16-17 times earnings, while pushing the dividend yield down to 2%.

At these levels, shares better reflect the long-term value of Medtronic and I believe Deutsche Bank is a bit late to upgrade shares. That being said, in this low interest rate environment, which is pushing up price-earnings ratios and the desire for dividend, shares could easily see more upside, This is especially true if Medtronic would boost its dividend.

I remain on the sidelines.

Source: Medtronic: It Might Be Too Late To Jump On The Momentum Bandwagon