Medtronic, Inc. (NYSE:MDT)

CAPS Rating: 4 out of 5

A medical technology Company alleviating pain, restoring health, and extending life for millions of people around the world.

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Member Avatar notyouagain (55.42) Submitted: 9/2/2015 1:14:41 PM : Outperform Start Price: $69.36 MDT Score: +1.15

Beginning start price $69.74

First, I'll treat you to this apparent disaster...

Wow. Return on equity, return on assets, net margin, asset turnover have taken a dive. What am I doing?

Gross margin hasn't fallen as much; it's still almost 70%.

So what's happening? Well, much of the deterioration of the first set of fundamentals are, I believe, traceable to the fall in asset turnover and net margin.

After all, (asset turnover X net margin) = return on assets...and (return on assets X financial leverage) = return on equity.
As a side note, financial leverage = (assets/equity)

So what has caused this awful mess in the fundamentals of this market-leading company that has raised dividends for 27 years and counting, and STILL requires only 40% of its free cash flow to pay the dividend?

Revenues are at an all-time high. Gross profit isn't that far behind. Let's put return on equity under a magnifying glass.

First, in its simplest form, return on equity = net income/stockholders' equity.

Well, anyone can see that's down. That doesn't reveal much. We need to break this down further, using what's called the DuPont breakdown of return on equity.

Return on equity = (asset turnover X net margin X financial leverage)

Which we can break down still further into:

(Revenues/assets) X (net income/revenues) X (assets/equity) = return on equity

Actually, the first two, asset turnover times net margin, equals return on assets. (after cancelling out revenues, ROA = net income/assets)

Ok. Here's what's happening. Medtronics made a huge acquisition recently (Covidien). This major acquisition drove goodwill and intangibles from just under 34% of total assets to just under 65% of total assets. So even though revenue is at an all-time high, now the first in our set of figures, asset turnover, includes good will and intangibles that have exploded upward.

The second set, net margin, suffers from operating income that includes $237M of restructuring expenses and $1,405M of expenses thrown into this category of "other" expenses..."other" being in general a catch-all for non-operating, non-recurring expenses. You can see that here:

Here's the problem with failing to dig into this stuff. You could look at the plummeting asset turnover, plummeting return on assets, and plummeting return on equity and decide you've seen all you need to see.

Or you could realize, if you've read and studied about these things, that after subtracting goodwill and intangibles, which have absolutely exploded, NONE of these metrics would be much out of line with the past.

One of Warren Buffet's favorite tricks is subtracting goodwill and intangibles to figure return on *tangible* equity.
Goodwill and intangibles are bookkeeping entries resulting from acquisitions. They represent only the excess cost over book value paid to acquire real assets. Goodwill and intangibles do not need to be replaced or added to once obtained the way real assets do (which is why real assets are depreciated and goodwill and intangibles aren't).

If we subtracted goodwill and intangibles for the first set in our expanded return on equity equation, we would find a remarkable difference in revenues/assets (*tangible* assets).

The second set, net income/revenues, would be remarkably higher without the restructuring and the jump in "other" operating expenses, many of which are probably nonrecurring.

Return on equity has dropped from around 20% and higher in the past to just over 7% following this acquisition.
Return on assets has dropped from over 10% to 3.7%.
Asset turnover has been cut almost in half.
Net margin has fallen from over 20% down to just over 13%.

And it's all likely traceable to these:

In 2014 goodwill was $10, 2015 it grew to $40,530M.

Between 2014 and 2015 intangibles grew from $2,286M to $28,101M.

You can see these here: that we've cleared up this apparent (and most likely temporary) weakness in some of MDT's key ratios, here's a couple others that more accurately reflect its true strength.

Quick ratio........2.7
Current ratio.....3.4

2014 EBITDA ...$4,934M
TTM EBITDA....$5,458M

This pullback, in case you hadn't noticed, enabled me to make this pick at last year's price level. and nobody green-thumbing MDT prior to December of last year, the last time it was around my start price, is in the red.

Trailing twelve months PE is 28.8.
FORWARD PE is 14.7 (

If it only requires 40% of free cash flow to pay the dividend now, I wonder what percent of forward free cash flow it will take?

If it currently takes 51% of earnings to cover the dividend, then it will take only 26% of projected forward earnings.


Like it always has.


Member Avatar optioncoach (90.71) Submitted: 8/11/2015 10:01:56 PM : Outperform Start Price: $76.53 MDT Score: -1.54

Buying the health care sector for exposure. Great development cd maker here.


Member Avatar NHWeston102 (< 20) Submitted: 4/23/2015 9:08:46 PM : Outperform Start Price: $77.66 MDT Score: -0.85

absorption of Covidien and alliance with IBN puts MDT in the lead to create an artificial pancreas and become a leader in diabetes management. They are also experimenting with concepts of possible pancreas transplants and grafts which might be come an actual cure for diabetics' currently incureable afflicition.


Member Avatar WilliamCrook2003 (70.51) Submitted: 4/23/2015 6:49:04 PM : Outperform Start Price: $77.66 MDT Score: -0.85

Undervalued and improving as a business.


Member Avatar jakebvt (25.29) Submitted: 2/20/2015 3:22:49 PM : Outperform Start Price: $77.54 MDT Score: -1.03

New approval from FDA, good growth, ratios, margins. See lots of potential in near future. 4/5 long term pick. Didn't give it 5 out of 5 because:

PE isn't amazing
some bad #s


Member Avatar MightyMinnow (33.90) Submitted: 12/30/2014 5:01:05 AM : Underperform Start Price: $72.39 MDT Score: -4.41

top skimming. I'm thinking that after new years investors will take some profits, hold the cash , then rotate it into beaten down dips. Insurance will be a growing pain too. The explorer gets the glory, the settler gets the land. Look for China to rip these guys off.


Member Avatar lrdixon (57.79) Submitted: 9/1/2014 10:08:59 PM : Outperform Start Price: $62.39 MDT Score: +17.06

Strong, stable health care company will perform better than the market during the upcoming market correction which may hit weak companies pretty hard.


Member Avatar moonlightsail (< 20) Submitted: 6/27/2014 9:40:55 AM : Outperform Start Price: $62.49 MDT Score: +13.97

A Blue Chip mega cap healthcare company


Member Avatar VincentChua (38.92) Submitted: 5/21/2014 11:46:59 AM : Outperform Start Price: $58.10 MDT Score: +19.02

strong financials coupled with strong growth


Member Avatar Dividends500 (83.54) Submitted: 4/3/2014 12:59:01 AM : Outperform Start Price: $52.97 MDT Score: +23.40

Dividends500 tracks the 200 strongest dividends in the S&P 500. To qualify as a strong dividend, the company must meet two simple requirements:

- A payout ratio below 50%
- An increasing dividend from the prior year

Because there are more than 200 dividend paying companies in the S&P 500 that meet these requirements, the qualifying companies with the largest dividend yields were chosen.

Dividends500 intends to test this FactSet article, which highlights these strong dividend paying companies and their outperformance versus the S&P 500 as a whole (Page 12).

If you have questions or see something you think is inaccurate feel free to let me know.


Member Avatar healthcarevalue (97.54) Submitted: 2/24/2014 4:57:06 PM : Outperform Start Price: $55.88 MDT Score: +22.06

16 times earnings, 12 percent return on invested capital, and 0.51 debt equity ratio.


Member Avatar ineedthatdollar (< 20) Submitted: 2/8/2014 5:19:03 PM : Underperform Start Price: $53.90 MDT Score: -23.65

Poorly run upper management!


Member Avatar afewgoodstocks11 (22.62) Submitted: 1/2/2014 9:13:51 PM : Outperform Start Price: $34.46 MDT Score: +51.39

Div. (Yield) $1.12 (2.0%)
Current Yield . . . . . . .3.14%


Member Avatar 2trpop (92.21) Submitted: 10/1/2013 8:55:27 AM : Outperform Start Price: $51.10 MDT Score: +23.40

fstg experiment


Member Avatar Teacherman333 (91.29) Submitted: 7/25/2013 11:36:02 AM : Outperform Start Price: $46.59 MDT Score: +33.57

For reference point and to allow for comments by others. As of the end of April, 2013.

ROE 19.38%
Trailing PE 13.40
PB 3.00
Div yield 2.00%


Member Avatar bclear2 (< 20) Submitted: 4/19/2013 12:53:43 AM : Outperform Start Price: $43.54 MDT Score: +37.61

As our population ages, this company should take advantage


Member Avatar Rugo (95.19) Submitted: 3/8/2013 11:00:16 AM : Outperform Start Price: $43.31 MDT Score: +38.93

As per future sectors article


Member Avatar jd8019 (53.39) Submitted: 3/3/2013 6:03:16 PM : Outperform Start Price: $42.64 MDT Score: +38.81

creates pace makers, stents, etc. for the aging baby boomers.


Member Avatar TeenStockPicker (36.54) Submitted: 3/1/2013 7:00:32 PM : Outperform Start Price: $42.64 MDT Score: +38.81

Long-term winner, baby boomers will continue to drive demand for products


Member Avatar bclan13 (98.49) Submitted: 2/5/2013 1:46:56 AM : Outperform Start Price: $44.17 MDT Score: +31.64

Best of breed medtech will see profits rise as acute care gpos become less important. Note I am not that bullish on medtech in general - I want to short almost everything else - but I want to take best of breed as a sort of hedge

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