Company Description:
Click here for a full description of the company’s operations (provided by Reuters).
Annual Report Highlights (latest report is for the period ending
Overview
Medtronic is the global leader in medical technology, alleviating pain, restoring health, and extending life for millions of people around the world. We are committed to offering market-leading therapies to restore patients to fuller, healthier lives. With beginnings in the treatment of heart disease, we have expanded well beyond our historical core business and today provide a wide range of products and therapies that help solve many challenging, life-limiting medical conditions. We hold market-leading positions in almost all of the major markets in which we operate.
We currently function in eight operating segments that manufacture and sell device-based medical therapies. During the fourth quarter of fiscal year 2007, we revised our operating segment reporting to separate Physio-Control from our Cardiac Rhythm Disease Management operating segment. Our operating segments are:
- Cardiac Rhythm Disease Management (CRDM)
- Spinal and Navigation
- Vascular
- Neurological
- Diabetes
- Cardiac Surgery
- Ear, Nose, and Throat (ENT)
- Physio-Control
With innovation and market leadership, we have pioneered advances in medical technology in all of our businesses and enjoyed steady growth. Over the last five years, our net sales have nearly doubled, from $6.411 billion in fiscal year 2002 to $12.299 billion in fiscal year 2007. We attribute this growth to our commitment to develop or acquire new products to treat an expanding array of medical conditions.
Medtronic was founded in 1949, incorporated as a
With approximately 38,000 dedicated employees worldwide personally invested in supporting our mission, our success in leading global advances in medical technology is the result of several key strengths:
- Broad and deep technological knowledge of microelectronics, implantable devices and techniques, power sources, coatings, materials, programmable devices and related areas, as well as a tradition of technological pioneering and breakthrough products that not only yield better medical outcomes, but more cost-effective therapies.
- Strong intellectual property portfolio that underlies our key products.
- High product quality standards, backed with stringent systems to help ensure consistent performance that meet or surpass customers’ expectations.
- Strong professional collaboration with customers, extensive medical educational programs, and thorough clinical research.
- Full commitment to superior patient and customer service.
- Extensive experience with the regulatory process and sound working relationships with regulators and reimbursement agencies, including leadership roles in helping shape regulatory policy in the U.S. and abroad.
- A proven financial record of sustained revenue and earnings growth and continual introduction of new products.
- Meet unmet medical needs by leveraging our core technologies.
- Ensure that people who could benefit from our device therapies increasingly have access to them.
- Increase market share in core product lines.
- Broaden our global presence in developed and developing markets.
- Acquire or invest in breakthrough technologies to treat an increasing number of chronic diseases.
Research and Development
During fiscal year 2007, 2006, and 2005, we spent $1.239 billion (10.1 percent of net sales), $1.113 billion (9.9 percent of net sales) and $951 million (9.5 percent of net sales) on research and development, respectively. Our research and development activities include improving existing products and therapies, expanding their indications and applications for use, and developing new products. While we continue to make substantial investments for the expansion of our existing product lines and for the search of new innovative products, we have also focused heavily on carefully planned clinical trials, which lead to market expansion and enable further penetration of our life changing devices.
Acquisitions and Investments
In addition to internally generated growth through our research and development efforts, historically we have relied, and expect to continue to rely, upon acquisitions, investments, and alliances to provide access to new technologies both in areas served by our existing businesses as well as in new areas.
On
On
On
Markets and Distribution Methods
Our marketing and sales strategy is focused on rapid, cost-effective delivery of high-quality products to a diverse group of customers worldwide. To achieve this objective, we organize our marketing and sales teams around physician specialties. This focus enables us to develop highly knowledgeable and dedicated sales representatives who are able to foster strong relationships with physicians and other customers, and enhance our ability to cross-sell complementary products. We believe that we maintain excellent working relationships with physicians and others in the medical industry that enable us to gain a detailed understanding of therapeutic and diagnostic developments, trends and emerging opportunities, and respond quickly to the changing needs of physicians and patients.
In keeping with the increased emphasis on cost-effectiveness in healthcare delivery, the current trend among hospitals and other customers of medical device manufacturers is to consolidate into larger purchasing groups to enhance purchasing power. As a result, transactions with customers have become increasingly significant, more complex, and tend to involve more long-term contracts than in the past. This enhanced purchasing power may also lead to pressure on pricing and increased use of preferred vendors. We are not dependent on any single customer for more than 10 percent of our total net sales.
Competition and Industry
We compete in both the therapeutic and diagnostic medical markets in more than 120 countries throughout the world. These markets are characterized by rapid change resulting from technological advances and scientific discoveries. In the product lines in which we compete, we face a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited selection of products. In addition, we face competition from providers of alternative medical therapies such as pharmaceutical companies.
Major shifts in industry market share have occurred in connection with product problems, physician advisories and safety alerts, reflecting the importance of product quality in the medical device industry. In the current environment of managed care, economically motivated buyers, consolidation among healthcare providers, increased competition, and declining reimbursement rates, we have been increasingly required to compete on the basis of price.
In order to continue to compete effectively, we must continue to create or acquire advanced technology, incorporate this technology into proprietary products, obtain regulatory approvals in a timely manner, and manufacture and successfully market these products.
Employees
On
Seasonality
Worldwide sales do not reflect any significant degree of seasonality.
Risk Factors
Investing in Medtronic involves a variety of risks and uncertainties, known and unknown, including, among others, those discussed below.- The medical device industry is highly competitive and we may be unable to compete effectively.
- Reduction or interruption in supply and an inability to develop alternative sources for supply may adversely affect our manufacturing operations and related product sales.
- We are subject to many laws and governmental regulations and any adverse regulatory action may materially adversely affect our financial condition and business operations.
- Our failure to comply with strictures relating to reimbursement and regulation of healthcare goods and services may subject us to penalties and adversely impact our reputation and business operations.
- Quality problems with our processes, goods, and services could harm our reputation for producing high quality products and erode our competitive advantage.
- We are substantially dependent on patent and other proprietary rights and failing to be successful in patent or other litigation may result in our payment of significant money damages and/or royalty payments, negatively impact our ability to sell current or future products, or prohibit us from enforcing our patent and proprietary rights against others.
- Product liability claims could adversely impact our financial condition and our earnings and impair our reputation.
- Our self-insurance program may not be adequate to cover future losses.
- If we experience decreasing prices for our goods and services and we are unable to reduce our expenses, our results of operations will suffer.
- Our international operations are subject to a variety of risks that could adversely affect those operations and thus our profitability and operating results.
- Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations.
- Healthcare policy changes may have a material adverse effect on us.
- Our business is indirectly subject to healthcare industry cost containment measures that could result in reduced sales of medical devices containing our components.
- Our research and development efforts rely upon investments and alliances, and we cannot guarantee that any previous or future investments or alliances will be successful.
- The success of many of our products depends upon strong relationships with physicians.
Our principal offices are owned by us and located in the
We also maintain sales and administrative offices in the
Stock Repurchase Program
In October 2005, our Board of Directors authorized the repurchase of up to 40 million shares of our common stock and in April 2006, the Board of Directors made a special authorization for us to repurchase up to 50 million shares in connection with the $4.400 billion Senior Convertible Note offering.
In June 2007, our Board of Directors authorized the repurchase of an additional 50 million shares of our common stock.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Level Overview
Net earnings for the fiscal year ended
Net sales in fiscal year 2007 were $12.299 billion, an increase of 9 percent from the prior fiscal year. Foreign currency translation had a favorable impact on net sales of $166 million when compared to fiscal year 2006. The increase in the current year was led by solid worldwide sales growth in the Vascular, Diabetes, Spinal and Navigation, and Neurological businesses and exceptional growth outside the United States (U.S.), where seven of our eight operating segments had growth rates ranging from 16 percent to 32 percent.
While we continue to make substantial investments in the expansion of our existing product lines and the search for new innovative products, we have also focused heavily on carefully planned clinical trials, which lead to market expansion and enable further penetration of our life changing devices. Fiscal year 2007 research and development spending of $1.239 billion increased 11 percent in comparison to the prior fiscal year.
We remain committed to our
Other Matters
On
We are currently in discussions with the U.S. Food and Drug Administration (FDA) regarding the corrective actions that need to be taken before shipping in the
The suspension of
Financial Highlights:
Revenue Growth (1-yr): 8.9%
Revenue Growth (9-yr average): 19.6%
Net Income Growth (1-yr): 10.1%
Net Income Growth (9-yr average): 28.3%
Earnings-Per-Share Growth (1-yr): 15.3%
Earnings-Per-Share (9-yr average): 25.7%
Free Cash Flow Growth (1-yr): 33.7%
Free Cash Flow Growth (9-yr average): 37.1%
Net Profit Margin (current): 22.8%
Net Profit Margin (10-yr average): 19.1%
Return On Equity (current): 27.5%
Return On Equity (10-yr average): 24.3%
Debt Ratio (current): 0.44
Current Ratio (current): 3.09
Financial analysis:
- Although the company is more leveraged than it was ten years ago (debt ratio of 0.26 in 1998), current debt ratio is still only 0.44.
- ROA has been fairly consistent throughout the past ten years. Currently it stands at 13.8% and 10-yr average is 15.9%.
- ROE has been relatively consistent as well. Currently it’s at 27.5% and 10-yr average is 24.3%.
- All margins (gross margin, operating margin, and net profit margin) have stayed relatively consistent throughout the past ten years. Profit margin is currently at 22.8% and company posted a 19.1% 10-yr average.
- Revenue growth has slowed down lately: growth in the 2007 fiscal year was a mere 8.9% while 9-yr average is 19.6%.
- Net income has been varying wildly: posting three-digit growth in 2000 and then slipping into negative territory in 2001, 2002, and 2005. Most recently, net income grew 10.1% and 10-yr average is 28.3%.
- Free Cash Flow has been fairly consistent and currently stands at an impressive 19.6%. FCF growth has been very rocky: a loss of 48% in 1999 followed by gains of 206% in 2000 and 99% in 2001 followed by losses of 14%, 2%, and 24% in 2002, 2005, and 2006, respectively. In the 2007 fiscal year, company showed FCF growth of 33.7% and 10-yr average is 37.1%. Those numbers are very impressive, but “consistency” and “stability” are definitely not the words to associate with such performance.
- Medtronic’s Current Ratio is rather impressive at 3.09. This shows that company is currently holding a lot of cash on hand, enough to pay for the current expenses three times over. Such high Current Ratio may suggest that company has transferred some of its assets into a more liquid form to be able to act fast on potential acquisition targets.
- Inventory Turnover has been consistent throughout the past ten years and currently stands at 2.65.
Discounted Cash Flow (DCF) Analysis:
I used discounted cash flow analysis to arrive at the intrinsic value of the company. I estimated that free cash flow would grow at an average rate of 14% per year for the next 10 years and at 3% (trailing GDP growth) perpetually after that. Company’s free cash flow grew at an average rate of 37% during the past nine years, which makes my conservative estimate very plausible.
I used a discount rate of 10% because Medtronic is a mature company with an established market leader position in many market segments and therefore can command a below-average discount rate.
Using the assumptions listed above, my intrinsic value of the stock came out to $69.06. My intrinsic value of Medtronic is somewhat higher than what Morningstar has as a “fair value” for this company. I believe our difference in opinion lies in the fact that Morningstar underestimates this company’s growth potential.
Pros:
- Medtronic is a wide-moat company with a diversified product portfolio that is further diversifying to treat more chronic diseases..
- Medtronic is an innovator and is often a market leader in its product segments.
- Company has a strong balance sheet and impressive growth rates throughout the past decade.
- Company is consistently buying back its common stock and plans to continue doing so in the future.
Cons:
- In the recent years, Medtronic has issued several volunteer product recalls, which has hurt its sales growth and possibly doctors’ confidence in its products.
- Medical device market is inherently risky as it’s driven by innovation, government regulations, and insurance reimbursement rates.
- Company has had a bumpy top- and bottom-line growth in the short-term, although it did provide investors with impressive returns over the long-term.
Final Decision:
Medtronic is an innovator in a great financial health that still has, in my opinion, significant potential for growth. Currently, MDT’s stock trades at $47 vs. $.69 that I have for intrinsic value of the company. Given my safety margin of 30-50%, it is within my buying price range $35-$48. At this point, Medtronic is most certainly “pre-approved” for a slot in my portfolio, but I will not make any final decisions on the portfolio picks until I have more solid candidates such as Medtronic and Johnson & Johnson.
0 comments:
Post a Comment