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Medtronic Inc: Cash Flow Valuation Update

|Includes:Medtronic plc (MDT)

Current Price: ~ $38/share
Projected Yield: ~ 2.74%

One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and spinal fixation devices. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 41% of the company's total sales.

Estimated WACC for the firm today is 8.86% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2003 1698
2004 2421
2005 2367
2006 963
2007 2285
2008 2883
2009 3215
2010 3496
2011 3193
2012 3971
Click to enlarge

Average Annual Growth FCF: ~ 20%

CAGR FCF: ~ 10%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year

Consensus Forecast Company 5-Year Growth: ~ 5% per year

Internal Growth Rate: ~ 9%

Sustainable Growth Rate: ~ 19%

Scenario 1
Average FCF (2012, 2011, 2010) is $3553 million

  • Start at $3553 million FCF
  • Assume a 5-year growth rate in FCF of 5% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 3553
1 3731
2 3917
3 4113
4 4319
5 4535
Terminal Value 53712
Click to enlarge

The firm's future cash flows, discounted at a WACC of 8.86%, give a present value for the entire firm (Debt + Equity) of $51087 million. If the firm's fair value of debt is estimated at $9965 million, then the fair value of the firm's equity could be $41122 million. $41122 million / 1030 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 8% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 3553
1 3837
2 4144
3 4476
4 4834
5 5221
Terminal Value 63603
Click to enlarge
  • Present Value of the entire firm (Debt + Equity): $58942 million
  • Value of Equity: $48977 million or $48/share
  • 20% margin of safety is $38/share

Sources

Morningstar.com

Yahoo! Finance

Medtronic.com

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

Stocks: MDT