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Alex Shadunsky
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Alexander Shadunsky began his career in business at a young age, when he became a part of the family newspaper business. After a brief stint in retail, he developed an interest in value investing and has been uncovering undervalued opportunities ever since. He is a regular reader of Seeking... More
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  • Medtronic: Weak Growth Projections Make This "Value" Stock Unappealing 0 comments
    Jun 4, 2012 6:06 PM | about stocks: MDT

    After an impressive run in the 1990's, Medtronic's (NYSE:MDT) stock hasn't done much and is down about 40% over the past 10 years. The stock still hasn't even come close to recovering to its pre-credit crisis highs as growth has significantly slowed. Analysts are projecting revenue growth for MDT of just 1.9% for this fiscal year followed by 3.1% for next fiscal year. Still, management is optimistic and in its Q4 release last month said that MDT is beginning to gain momentum worldwide and is optimistic about its ability to improve long-term growth as its expands globally and identify new opportunities. The caveat is that management only guided for revenue growth of 2-4%. If the company is gaining momentum, it's not much. The valuations suggest that the stock is slightly undervalued to fairly valued but that may be about right considering the growth projections.

    Valuation: Medtronic's trailing 5 year valuation metrics suggest that the stock is undervalued as all of the metrics are below their respective 5 year averages. Medtronic's current P/B ratio is 2.2 and it has averaged 3.3 over the past 5 years with a high of 5.2 and low of 2.2. Medtronic's current P/S ratio is 2.3 and it has averaged 3 over the past 5 years with a high of 4.6 and low of 2.2. Medtronic's current P/E ratio is 10.5 and it has averaged 17.3 over the past 5 years with a high of 27.5 and low of 11.

    EV/EBITDA Comps: On an EV/EBITDA basis comparison, the stock is valued about right. Medtronic's current EV/EBITDA multiple is 8.5 versus the average of 7.9 for its publicly traded comps. The company by company multiples follow: Boston Scientific has an EV/EBITDA multiple of 7.43, Johnson & Johnson has a multiple of 8.01, and St. Jude Medical has a multiple of 8.22.

    Price Target: The consensus price target for the analysts who follow Medtronic is $42. That is upside of 18% from today's stock price of $35.86 and suggests that the stock is fairly valued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.

    Forward Valuation: Medtronic is currently trading at about $36 a share with analysts expecting EPS of $3.86 next year, an earnings increase of 5% y/y, for a forward P/E ratio of 9.3. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. Boston Scientific (NYSE:BSX) is currently trading at about $6 a share with analysts expecting EPS of $0.48 next year, an earnings increase of 12% y/y, for a forward P/E ratio of 12. Johnson & Johnson (NYSE:JNJ) is currently trading at about $62 a share with analysts expecting EPS of $5.45 next year, an earnings increase of 6% y/y, for a forward P/E ratio of 11.4. St. Jude Medical (NYSE:STJ) is currently trading at about $37 a share with analysts expecting EPS of $3.69 next year, an earnings increase of 6% y/y, for a forward P/E ratio of 10.1. The mean forward P/E of Medtronic's competitors is 11.2 which suggests that Medtronic is undervalued relative to its publicly traded competitors.

    Earnings Estimates: Medtronic has beat EPS estimates 2 times in the past 4 quarters. The company's EPS figures have come in between 0 cents and 2 cents from consensus estimates or about 0% to 2.4% from analyst estimates. The company's earnings come been relatively close to consensus estimates which suggests that analysts are good at projecting the company's results and share upside from earnings surprises will be limited.

    Price Action: Medtronic is down 6.86% over the past year, underperforming the S&P 500, which is about flat. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $37.85 and below its 200 day moving average, which sits at $36.27.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: MDT
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