While Medtronic Recovers, Remember How Good It Can Be

Dec.14.06 | About: Medtronic plc (MDT)

Today, WallStrip looks at Medtronic (NYSE:MDT). Medtronic is simply an amazing company. The medical device maker has increased its dividend every year for the past 28 straight years! In the lat 40 years, Medtronic's stock has split 2-for-1 ten times. That turned every one share into 1,024 shares.

Ah, but what have you done for me lately? Well, for starters, three weeks ago the company gave us another great earnings report. For the October quarter, MDT made 59 cents a share, three cents more than Wall Street was expecting.

More importantly [in my mind], Medtronic stood by its earnings forecast for FY2007 and FY2008 [its fiscal year ends in April]. For 2007, MDT expects earnings-per-share to range from $2.30 to $2.38. And in 2008, it expects EPS of $2.65 to $2.75. Trust me, not many companies make public forecasts like that.

This was actually a reiteration of an earlier projection. I always like to see companies stand by their forecasts. This is especially important in Medtronic’s case because the stock’s relative valuation has dropped sharply this year.

Shares of Medtronic routinely traded above 25 times earnings. But this summer, the stock plunged to a four-year low, even as its earnings and dividends continued to grow. Check out this graph:


The black line [left scale] is the share price, and the blue line is the earnings [right scale]. The red is the company’s projection. The two sides of the chart are set at 25-to-1. If anything, the lower end of the forecast appears to be very conservative.

You can see that the stock really got smacked around. The good news is that its been recovering, but even a $60 share price today would still been on the modest side by historical standards.

While the P/E ratios have narrowed in general for the overall market, the effect has been even greater on Medtronic. Here's a chart showing MDT's P/E compared with the S&P 500.

PE Rations MDT and SPY

Here's Medtronic's relative P/E ratio, which is probably one of the purest measures of values. The relative P/E ratio is simply the company's P/E divided by the market's P/E. Medtronic would often carry an earnings multiple 50% to 70% greater than the market's. Today, that's down to 44%, but it's higher than where it was.

Relative PE Ratio

Here are Medtronic's numbers for the past several quarters: