Playing It Safe With Medtronic

| About: Medtronic plc (MDT)

In the difficult market that we find ourselves, I also find it difficult to highlight new stocks that I find appropriate to include in this blog and possibly in my own portfolio. Picking up an old copy of "100 Best Stocks to own in America" by Gene Walden (7th edition), (which you can pick up here on Amazon), I opened up the page on Medtronic (NYSE:MDT) and thought it might be worthwhile to revisit this stock. (Even though Walden's classic is nearly 10 years old, I still find inspiration in his philosophy and discipline.)

I last wrote up Medtronic on Stock Picks on November 29, 2009. At this time, I do not own any shares of this stock. Medtronic closed at $35.57 on August 13, 2010, down $(.42) on the day.

Click to enlarge According to the Yahoo "Profile" on Medtronic, the company

...manufactures, and sells device-based medical therapies worldwide. Its Cardiac Rhythm Disease Management segment offers cardiac pacemakers, implantable defibrillators, cardiac resynchronization therapy devices, atrial fibrillation products, leads, ablation products, electrophysiology catheters, information systems, diagnostics and monitoring products, and patient management tools. The company's Spinal segment offers thoracolumbar, cervical, and interbody spinal devices; bone growth substitutes; and devices for vertebral compression fractures and spinal stenosis. Its CardioVascular segment offers coronary and peripheral stents and related delivery systems, endovascular stent graft systems, distal embolic protection systems, perfusion systems, positioning and stabilization systems, products for the repair and replacement of heart valves, and surgical ablation products, as well as balloon angioplasty catheters, guide catheters, guidewires, diagnostic catheters, and accessories. The company's Neuromodulation segment offers neurostimulators, implantable drug delivery systems, deep brain stimulation systems, and urology and gastroenterology devices. Its Diabetes segment offers external insulin pumps, continuous glucose monitors, carelink therapy management software, and blood glucose meters. The company's Surgical Technologies segment offers tissue-removal systems, surgical drill systems, fluid-control products, cranial fixation devices, nerve monitoring systems, image-guided surgery systems, intra-operative imaging systems, a Ménière's disease therapy device, and a portfolio of products to treat benign snoring and obstructive sleep apnea.

To summarize, they are involved in medical devices that treat heart rhythm, spinal, CNS, diabetic, and surgical and sleep apnea problems.

Medtronic has announced that it will be reporting on 1st quarter 2011 results on August 24, 2010. They recently announced their completed acquisition of ATS Medical for $370 million, expanding their cardiac surgical and diagnostic line of products. Since the 4th quarter report, Medtronic announced a dividend increase of 9% from $.205/share to $.225/share.

On May 25, 2010, Medtronic reported 4th quarter 2010 results with revenue growth of 10% from $3.8 billion in the year earlier perior to $4.2 billion this quarter. Analysts had expected $4.19 billion in revenue. Net income rose to $954 million or $.86/share in quarter ended April 30, 2010, up from $103 million or $.09/share the prior year. Adjusted earnings came in at $.89/share, a penny ahead of estimates. [see transcript]

Longer-term, checking the Morningstar Financials on MDT, we can see that revenue has increased from $11.3 billion in 2006 to $15.8 billion in 2010. Net income has increased from $2.5 billion in 2006 to $3.1 billion in 2010 after a dip in both 2008 and 2009, results rebounded in 2010.

Earnings per share similarly climbed from $2.09/share in 2006 to $2.41/share in 2007, before dipping to $1.95 in 2008 and $1.93 in 2009. Earnings rebounded to $2.79/share in 2010. Outstanding shares have gradually dipped from 1.2 billion in 2006 to 1.1 billion in 2010.

Free cash flow has been strong with $963 million reported in 2006 increasing steadily to $3.56 billion in 2010.

Medtronic's balance sheet appears solid with latest Morningstar results showing $9.8 billion in current assets in 2010 with total current liabilities reported at $5.12 billion. Non-current liabilities are recorded at $8.3 billion.

Checking the Yahoo "Key Statistics" on Medtronic, we can see that this stock is a large cap stock with a market capitalization of $38.52 billion. The company has a very modest p/e of 12.74 with a forward p/e (fye Apr 30, 2012) of 9.34 with a resultant PEG (5 Yr Expected) of 1.05.

The company has 1.08 billion shares outstanding. As of July 30, 2010, there were 11.46 million shares out short representing a short ratio of only 1.90. The company currently pays a forward dividend of $.90/share with a forward yield of 2.5%. The payout ratio is only 29% suggesting ample room for dividend payment and growth.

If we examine the "point & figure" chart on Medtronic from StockCharts.com, we can see that the share price broke down from a high of $54 in August, 2008, to a low of $24 in February, 2009, before moving higher through resistance at $41. After a recent peak at $47 in January, 2010, the stock has sold off testing its recent support levels at $35. Overall, the stock appears to be nominally in an uptrend and certainly not over-extended.

Click to enlarge

In conclusion, Medtronic is an old favorite of mine that represents excellent value with a p/e just over 12, a PEG just over 1.0 and a dividend yield of 2.5%. The company reported 2010 results that reversed a two-year slide in earnings and revenue growth. However, they are set to report earnings once again in the next ten days.

As we look for 'safe' places to park our investment money, Medtronic may well represent the value and long-term prospects that make this a timely investment.

Disclosure: None.