Medtronic - Second Quarter Earnings Confirm Long-Term Investment Thesis

| About: Medtronic plc (MDT)
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Shares of Medtronic (MDT) ended the short Thanksgiving trading week with total gains of almost 6%. The medical technology company reported a decent set of second quarter earnings on Tuesday.

Second Quarter Earnings

Medtronic reported second quarter revenues of $4.09 billion, up 1.8% on the year before. A strong dollar negatively impacted Medtronic's revenues, which rose 5% on a constant currency basis. Revenues comfortably beat analysts consensus of $4.05 billion.

Medtronic reported a net profit of $646 million down 26% on the year. Diluted earnings per share fell 23% to $0.63 per diluted share. Net earnings were impacted by a $245 million charge related to the Structural Heart business.

Non-GAAP earnings, which exclude the one-time charges, came in flat at $902 million. Diluted earnings per share rose 5% to $0.88 per share, which was in line with analysts expectations.

CEO and Chairman Omar Ishrak commented on the results, "Our second quarter performance reflects the results of our ongoing focus to deliver consistent and dependable growth in a changing healthcare environment. Our growth was broad-based across several businesses and geographies, driven by continued stabilization of our end markets and the ongoing successful execution of new product launches."

Detailed Information

Medtronic relies on its emerging and international businesses for revenue growth. International revenues rose merely 1% in constant currencies to $1.81 billion, but were up 8% in constant currencies.

Emerging market revenues rose 14% in dollars, but were up 18% in constant currencies, coming in at $464 million.

Cardiac and Vascular Group

Revenues for the cardiac and vascular business rose 6% on a constant currency basis, and were up 2% in reported dollars to $2.14 billion. A strong performance in Coronary, Endovascular and the Structural Heart business was offset by weakness at Pacing. International sales rose 7% in constant currencies, and were flat as reported.

Restorative Therapeutics Group

The restorative business reported a 2% increase in revenues to $1.96 billion. In constant currencies, revenues were up by 4%. Strength in surgical technologies, diabetes and neuromodulation was offset by weakness in the spine business.


For its fiscal year of 2013, Medtronic expects revenue growth between 3 and 4% on a constant currency basis. Full year diluted earnings per share are expected to come in between $3.62 and $3.70 per share, up 5 to 7% compared to its fiscal 2012. Analysts expected Medtronic to earn $3.66 per share for its fiscal year of 2013 on revenues of $16.44 billion.

CEO Ishrak commented on the outlook, "We were encouraged by our balanced Q2 results, which outperformed the MedTech market. However, we remain focused on delivering this kind of performance consistently over an extended period of time. By implementing our growth strategies, we will position ourselves to be a leader in creating long-term value in healthcare."


Medtronic ended its second quarter with $2.7 billion in cash, equivalents and short term investments. Furthermore Medtronic holds over $8.8 billion in long-term investments. The company operates with $11.5 billion in short and long term debt.

For the first six months of its fiscal 2013, Medtronic generated revenues of $8.1 billion. The company net earned $1.51 billion, or $1.46 per diluted share. Full year revenues could come in around $16.8 billion, with earnings coming in around $3.6-$3.8 billion.

After last week's rally, the market values Medtronic at $44.1 billion. This values the firm at 2.6 times 2013s annual revenues, and approximately 11-12 times annual earnings.

Medtronic pays a quarterly dividend of $0.26 per share, for an annual dividend yield 2.4%.

Some Historical Perspective

Year to date, shares of Medtronic have returned roughly 13%. Shares started the year around $39 and have traded in the high-thirties for most of 2012. Shares quickly advanced to year highs around $45 in the beginning of October. Shares are currently exchanging hands at $43 per share.

Shares of Medtronic traded around all time highs of $60 around the turn of the Millenium, a level last seen at the start of 2006. Shares fell to $25 in the beginning of 2009 during the financial crisis, but have recovered ever since. Between its fiscal 2009 and 2012, the company expanded its annual revenues from $14.6 billion to $16.2 billion. Annul earnings grew from $2.1 billion to $3.6 billion over the same time period.

Investment Thesis

Last month, I took a look at Medtronic's prospects when the company announced the acquisition of Kanghui. Shares of Medtronic have stagnated over the past five years, trading with losses of roughly 10%. At the same time, Medtronic grew revenues at a steady pace and has shown strong earnings growth, making the valuation more appealing.

The prospects for Medtronic look a bit better after the company sees stabilization in its end markets for heart-rhythm and spinal devices, a market under pressure given the high treatment costs.

The long term prospects for Medtronic remain good and shares are appealing based on both earnings multiples and a decent dividend yield. I expect shares to trade in their fifties next year.

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.