Medtronic: Improving Fundamentals Warrant A Higher Valuation

| About: Medtronic plc (MDT)

Shares of Medtronic Inc. (MDT) ended the trading week roughly flat. The company, known from its medical technology focused on chronic conditions, reported its first quarter results on Tuesday.

First Quarter Results

Medtronic reported first quarter revenues for its fiscal 2013 of $4.0 billion, up 2% compared to last year. Excluding the adverse effects of a stronger dollar, revenues were up 5%. Reported revenues matched analysts predictions.

Net earnings rose 5% to $864 million, while earnings per diluted share rose 8% to $0.83. Non-GAAP earnings per share came in at $0.85, in line with analysts expectations.

Medtronic's first quarter was relatively strong. However, Medtronic remains cautious, given the state of the global economy. The company sees signs of stability in its heart- and spinal devices.

Chairman and CEO Omar Ishrak commented on the results:

"We delivered another quarter of improving revenue growth in a dynamic healthcare environment. Once again, our growth was broad-based across businesses and geographies and reflects the positive impact of well-executed product launches and stabilizing end-markets."

Segmental Information

Cardiac and Vascular Group

The Cardiac, Coronary, Heart and Vascular business reported first quarter revenues of $2.11 billion, up 1% in nominal terms, and 4% in constant dollars. The company saw strong performance in Coronary and the Endovascular business, partially offset by weakness in the Pacing business.

Coronary revenues rose 11%, or 16% on a constant currency basis, driven by sales of drug-eluting stents. Endovasular revenues rose 12%, or 17% on a constant currency basis. Revenues were driven by product launches of Endurant II and the introduction of the abdominal aortic stents in Japan.

International sales rose 5% on a constant currency basis to $1.16 billion, falling 2% on a reported basis.

Restorative Therapies Group

The restorative group reported sales of $1.89 billion, up 5% on a constant basis, and 3% in nominal terms. Growth was driven by the surgical technologies and Neuromodulation business, offset by weakness in the Spine division.

Growth at the surgical technologies business was driven by the acquisition of Peak Surgical and Salient Surgical Technolgies. Neuromodulation revenues rose 8% to $419 million, driven by acceptance of the cord stimulator, among others.

International sales rose 7% on a constant currency basis to $616 million, rising 1% in nominal terms.


For the full year of its fiscal 2013, Medtronic expects to earn $3.62-$3.70 per share. The outlook implies a 5-7% earnings per share growth compared to last year. On average, analysts expected the company to guide for earnings of $3.66, the midpoint of the company's guided range.

CEO Ishrak commented:

"Our first quarter results represent another positive step forward toward our goal of delivering consistent and dependable growth. I am confident that our market-leading portfolio and pipeline, coupled with our focus on globalization and economic value, provide us with significant opportunities for growth."


Medtronic ended its first quarter with $2.5 billion in cash, equivalents and short term investments. The company operates with $10.8 billion in short and long term debt, for a net debt position of $8.3 billion.

The company is on track to report annual revenues around $16 billion for its fiscal 2013. Medtronic is expected to earn around $3.66 per share. Based on a market valuation of $42 billion, this values Medtronic at roughly 2.6 times annual revenues and 11 times annual earnings.

The valuation compares to an annual revenue multiple of 2.4 times for Stryker Corporation (NYSE:SYK), which trades at 15 times annual trailing earnings.

Medtronic currently pays a quarterly dividend of $0.26 per share, for an annual dividend yield of 2.6%.

Investment Thesis

Year to date, shares of Medtronic trade with modest gains around 5%. Shares have moved within a $31-$41 trading range, trading near the upper range at the moment.

Over the past five years, shares of Medtronic have fallen roughly by a quarter. The company steadily expanded its annual revenues from $14.6 billion in 2008, to $16.2 billion in 2011. Net earnings rose from $2.0 billion towards $3.6 billion in the meantime. Medtronic repurchased 5% of its shares outstanding during the time period, boosting annual earnings per share from $1.84 towards $3.22. Furthermore, Medtronic has doubled its quarterly dividend from $0.13 per share to $0.26 now.

Combined, these developments result in a favorable situation for long-term investors. Medtronic managed to grow revenues, while simultaneously boost its margins, resulting in fast growth in earnings per share. In the meantime, excess cash was used to increase dividends and repurchase shares. Yet, the share price remained roughly stable, resulting in more appealing valuation multiples.

Valued, at just 11 times annual earnings, shares in Medtronic provide investors with a decent long-term investment opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.