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Barron's Is Wrong On Medtronic
I love Barron’s. I really do. I read it from cover to cover, and I truly believe it is one of the few business publications that knows the difference between a good company and a good stock. Now that I’ve sugared it up, let me tell you this: its article on Medtronic is wrong! Here are some arguments the Barron’s article made that require my rebuttal:
“The stock looks cheap, trading at about 8.2 times expected forward earnings, but the company's 10% long-term-earnings growth rate is below the industry average…
At 8.2 times earnings, the market prices in zero growth. If any growth is produced, even half of its “below-industry-average” growth, the stock will not be trading at 8.2 times earnings, but at a much higher valuation. Ironically, today’s low valuation gives MDT earnings a yield of 12%. If MDT remains at this valuation for a long time, it can buy back 12% of the company year after year, and this in itself would result in 12% earnings growth.
“… and it carries a fair amount of debt….
The amount of debt seems high at first, at $10.5 billion; but the company has $3.9 billion in cash and short-term investments, thus net debt is closer to $6.6 billion. MDT generates $3.4 billion of free cash flows – it can pay off ALL of its net debt in less than two years. Also, don’t confuse MDT with low-quality, highly cyclical stocks that were in vogue in the first half of 2010. This is a company that maintained a return on capital of over 20% for decades – an indication of a significant moat. Its revenues are extremely predictable, cash flows are very stable, and thus debt levels are very reasonable. Medtronic’s stock was punished with a 10% decline for lowering its guidance by an astonishingly minor 2%.
“The stock is also a historical underperformer, turning in losses year-to-date, as well as in the last one-, two-, and five-year periods that are greater than its peers in the Dow Jones U.S. Medical Equipment Index and the overall market….
This argument fails to draw a distinction between fundamental performance and stock performance. Over the last ten years, MDT grew both sales and earnings per share at 14% a year. It increased dividends 17% a year. These are not the vital signs of an “underperformer.” As the article pointed out, MDT’s stock has gone nowhere over the past decade – that is true, but not because MDT was mismanaged or failed to grow, but rather because at the turn of the last century MDT was trading at almost 50 times earnings. Medtronic is a typical sideways-market stock: it was severely overvalued at the end of the secular bull market, thus its earnings and cash flows grew while P/Es contracted. This happened to a battalion of stocks, from Wal-Mart to J&J to Pepsico. In fact when I hear the statement that a stock has “not gone anywhere,” I immediately start looking at the stock to see if it is a buy.
“Nor do there seem to be any new products in Medtronic's pipeline that will reach the market in time to reverse the company's near-term lackluster sales.”
I was surprised to read this because Barron’s is usually one of the few investment publications that has a time horizon beyond “near-term.” Over the last several decades MDT has demonstrated its ability to innovate and come up with viable new products. Will that happen again “near-term”? Don’t know. Longer-term? Likely.
The Barron’s article painted Medtronic as a bad company and a bad stock. It is neither.
My firm has a position in MDT.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007). To receive Vitaliy’s future articles by email, click here.
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I sold all my MDT @ 37 (at a loss from 45) and doubled down on my STJ. MDT has made some hefty acquisitions but they have overpaid as you can see by the stock price and sluggish growth. I say Barrons is wrong about new products as I believe they have beaten Edwards (EW) to market with the trans catheter heart valve in the US. I am recently short EW and have Oct/Nov put spreads based on valuations EV/EBITDA=20. If you talk with anyone in the industry they will tell you MDT has #2 technology but a #1 sales force. MDT would be wise to focus on its diabetic pump, TCHV and ICD's as they are all products that can reduce total health care cost (one time investment vs frequent trips to the Dr.& long surgery recoveries) but the whole industry needs to step up the lobbying efforts to convince medicare and ins companies that their devices are worth the money. Look for JNJ to make acquisitions in this area but they are one of the few companies with the discipline not to overpay. Look at what happened to BSX when the overpaid for GDT. BSX market cap is actually smaller now than what they paid for guidant a few years back. The demographics of this space are extremely compelling!
"The demographics of this space are extremely compelling! "
You bet they are, which is why smart funds are investing there.
Zimmer (ZMH) looks better to me...
I just got of raw sewage....I love it.
MDT seems like a reasonably strong company. But MTD is subject to the whims of an increasingly unpredictable and capricious FDA. Additionally, their cardiovascular and spine businesses are both under intense scrutiny and pressures in average selling price, regulatory scruntiny, declining physician reimbursements, and emerging competitors that include surgeon-owned medical device distributors. Despite MDT's gross margin improvement and the longstanding history of consistent earnings growth, the Med Tech segment that we all knew and loved 10 years ago is not today, nor in the future, destined to repeat this type of performance.
Barron's ran so many ridiculous puff cover stories on GM, AIG, banks and Real Estate in 2008 before the crash......obviously a total rag for elmer fudds.
I dont read baron much since i dont see much detail to their recommendations(nor do i see in fortune or forbes or other popular maz)..if you jus want to see the few stats n profile jus go to yahoo finance and u can see as much as u want or jus screen the ratios in ur brokerage account...however i do beleive that if u subscribe to this blog www.boombustblog.com, it will be worth the $$$....even Eric Sprott calls it one of th best, detailed investment reasearch....check the performance....http://boombustblog.com/actionable-research-and-ideas.html
Why is cramer pushing the stock? interviewing the ceo? begging people to buy the thing?
Medtronic shares fell sharply on Tuesday after earnings disappointed analysts. When I talk to my doctor friends, they're not impressed with the company. But when I look at which top funds own and bought more shares in Q2, I think maybe this an excellent time to accumulate (would prefer if it fell below $30).
And don't forget Chinese solar stocks!
Forget them? I love 'em: