MDT Stock Study (5-9-24)

Posted by Mark on May 27, 2024 at 07:17 | Last modified: May 9, 2024 12:01

I recently did a stock study on Medtronic PLC with a previous closing price of $81.55.

M* writes:

     > One of the largest medical-device companies, Medtronic develops
     > and manufactures therapeutic medical devices for chronic diseases.
     > Its portfolio includes pacemakers, defibrillators, heart valves,
     > stents, insulin pumps, spinal fixation devices, neurovascular
     > products, advanced energy, and surgical tools. The company
     > markets its products to healthcare institutions and physicians
     > in the United States and overseas. Foreign sales account for
     > roughly 50% of the company’s total sales.

Over the last 10 years, this large-size company has posted annualized growth of 5.5% and 2.3% for sales and EPS, respectively. Sales dips in ’20 and ’23 while EPS dips in ’15, ’18, ’21, and ’23 (FY ends 4/30 and references to year on the website and Value Line need to be incremented by one). As a result, lines are generally up but not very straight or parallel. While visual inspection could certainly be worse, I’m not surprised to see MDT missing from the First Cut database until now.

Over the past decade, PTPM leads peer and industry averages while ranging from 12.9% in ’21 to 21.8% in ’14 with a last-5-year mean of 15.7%. ROE slightly trails peer and industry averages while declining from 15.6% in ’14 to 7.3% in ’23 with a last-5-year mean of 8.4%. Debt-to-Capital is less than peer and industry averages while falling from 37.9% (’14) to 32.1% (’23) with a last-5-year mean of 32.8%.

Current Ratio is 1.5 and Interest Coverage is 8.9. M* rates “Standard” for Capital Allocation while Value Line gives a Financial Strength rating of A+.

With regard to sales growth:

• YF projects YOY 3.2% and 4.2% for ’24 and ’25, respectively (based on 32 analysts).
• Zacks projects YOY 3.2% and 4.0% for ’24 and ’25, respectively (11 analysts).
• Value Line projects 4.3% annualized growth from ’23-’28.
• CFRA projects 3.9% YOY and per year for ’24 and ’23-’25.
• M* offers a 2-year annualized ACE of 3.9% and projects 4.0% per year through ’28 in its analyst note.

I am forecasting below the range at 3.0% per year.

With regard to EPS growth:

• MarketWatch projects 1.9% and 4.0% per year from ’23-’25 and ’23-’26, respectively (based on 34 analysts).
• Nasdaq.com projects 6.0% and 7.5% per year for ’24-’26 and ’24-’27 [14/6/1 analyst(s) for ’24/’26/’27].
• Seeking Alpha projects 4-year annualized growth of 5.3%.
• YF projects YOY 1.7% contraction and 4.8% growth for ’24 and ’25, respectively (32), along with 5-year annualized growth of 3.5%.
• Zacks projects YOY 1.7% contraction and 5.0% growth for ’24 and ’25, respectively (14), along with 5-year annualized growth of 5.6%.
• Value Line projects 8.2% annualized growth from ’23-’28.
• CFRA projects 1.5% YOY contraction and 1.9% growth per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 4.0%.
• M* projects long-term annualized growth of 9.7%.

I am forecasting below the long-term-estimate range (mean of five: 6.5%) at 3.0% per year. I will use ’23 EPS of $2.82 as the initial value rather than 2024 Q3 $3.14/share (annualized).

My Forecast High P/E is 29.0. Over the past decade, high P/E trends up from 20.8 (’14) to 37.7 (’23) with a last-5-year mean of 37.5 and a last-5-year-mean average P/E of 31.7. My forecast is near the bottom of the range (only ’14 is lower).

My Forecast Low P/E is 22.0. Over the past decade, low P/E trends up from 15.4 (’14) to 26.9 (’23) with a last-5-year mean of 25.9 and last-10-year median of 24.1. My forecast is near the bottom of the range [only ’14 and ’20 (20.4) are lower].

My Low Stock Price Forecast (LSPF) of $62.00 is default based on $2.82/share initial value. This is 24.0% less than previous close and 9.9% less than the 52-week low.

Over the past decade, Payout Ratio (PR) ranges from 37.1% (’14) to 96.5% (’23) with a last-5-year mean of 74.2%. I am forecasting below the range at 37.0%.

These inputs land MDT in the HOLD zone with a U/D ratio of 0.7. Total Annualized Return (TAR) is 4.3%.

PAR (using Forecast Average—not High—P/E) of 1.9% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead (still less than the risk-free rate).

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 85 studies done in the past 90 days (my study and 21 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 4.0%, 6.0%, 32.0, 25.2, and 72.9%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 18.0 that is much lower than MS (28.6) and mine (25.5).

MS high / low EPS are $4.29 / $3.12 versus my $3.27 / $2.82 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS of $7.85 is much greater than both (thereby offsetting the 18.0 from above).

MS LSPF of $68.80 implies a Forecast Low P/E of 22.1 versus the above-stated 25.2. MS LSPF is 12.5% less than the default $3.12/share x 25.2 = $78.62 resulting in more conservative zoning. MS LSPF is 11.0% greater than mine, however.

TAR (over 15.0% preferred) is much less than MS 12.4%. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 2.7 and 8.4 per Zacks and my projected P/E, respectively: the latter significantly overvalued due to my low growth rate. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly undervalued at 0.82.

Some may argue this study to be unreasonably harsh. I give a haircut by using initial value at the bottom of a sinusoidal historical EPS uptrend and by lowballing a historically uptrending P/E range. I also minimize PR, which hurts a stock that pays an above-average yield (TAR would be 5.6% for 74.0% PR). In case of overkill, next time I might consider taking initial value at the trendline (unless cyclical forces have already done so).

Remember visual inspection is weak, though, and that justifies a greater MOS and ultimately my recommendation to SELL.

MDT is a BUY under $70/share. With a forecast high price ~$95, my personal TAR criterion will be satisfied ~$48.