ModernGraham Quarterly Valuation Of Covidien

Apr.14.14 | About: Medtronic plc (MDT)

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Defensive Investor. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Covidien Ltd (COV) fares in the ModernGraham valuation model.

COV Chart

COV data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $69.03
MG Value $110.29
MG Opinion Undervalued
Value Based on 3% Growth $53.93
Value Based on 0% Growth $31.61
Market Implied Growth Rate 5.03%
Net Current Asset Value (NCAV) -$9.74
PEmg 18.56
Current Ratio 2.62
PB Ratio 3.31
Click to enlarge

Balance Sheet - 12/27/2013

Current Assets $5,840,000,000
Current Liabilities $2,225,000,000
Total Debt $5,016,000,000
Total Assets $19,619,000,000
Intangible Assets $10,674,000,000
Total Liabilities $10,223,000,000
Outstanding Shares 450,150,000
Click to enlarge

Earnings Per Share

2014 (estimate) $3.95
2013 $3.40
2012 $3.92
2011 $3.79
2010 $3.10
2009 $1.78
2008 $2.86
2007 -$0.68
2006 $2.88
2005 $2.26
2004 $2.65
Click to enlarge

Earnings Per Share - ModernGraham

2014 (estimate) $3.72
2013 $3.47
2012 $3.37
2011 $2.78
2010 $2.18
2009 $1.75
Click to enlarge

Dividend History

COV Dividend Chart

COV Dividend data by YCharts


Covidien is suitable for the Enterprising Investor but not the Defensive Investor. The company has shown insufficient earnings stability over the 10-year period, does not have a long enough dividend history, and has a high PB ratio for the Defensive Investor. For the Enterprising Investor, the only gripe is the high level of debt relative to the current assets, but that alone is not enough to eliminate the company from potential investment. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to competitors through a review of ModernGraham's valuation of C.R. Bard (NYSE:BCR) and ModernGraham's valuation of Medtronic (NYSE:MDT). From a valuation perspective, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.18 in 2010 to an estimated $3.72 for 2014. This demonstrated level of growth outpaces the market's implied estimate of 5.03% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

Disclaimer: The author did not hold a position in Covidien Ltd (COV) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.