MDT Intrinsic Value - We Study Billionaires (MDT) is the largest standalone medical device company...
Transcript of MDT Intrinsic Value - We Study Billionaires (MDT) is the largest standalone medical device company...
Intrinsic Value Assessment of
MEDTRONIC (MDT)
DECEMBER 7, 2017 This article was written in collaboration with Christoph Wolf from The Investor’s Podcast and Christoph Wolf Value Investing
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
IntroductionMedtronic(MDT)isthelargeststandalonemedicaldevicecompanyintheworld.Ithashistoricallyfocusedoncardiovasculardevicessuchascardiacpacemakers,implantablecardioverter-defibrillators,andartificialheartvalves.In2014,theacquisitionofCovidienaddedminimallyinvasivetherapiestoitsportfolio.Also,restorativetherapiesforthespineorbrain,aswelldiabetestreatmentareimportantparts.
WhileMedtronic’smarketpositionisextremelydominantanditsbusinessismostlyrecession-proof,the$50billiontakeoverofCovidienalsoweakeneditsbalancesheet.Doesitscurrentstockpriceof$82offeranattractiveentrypriceforinvestors?
TheIntrinsicValueofMedtronicTodeterminethevalueofMedtronic,let’sconsideritshistoryoffreecashflows.Happily,forinvestors,Medtronic’sbusinessisrathercapital-lightandoffersjuicymargins.Combinethiswithconstantlyrisingrevenues,andonegetsthefreecashflowseeninthechartbelow:Steadilyincreasingandalmostrecession-proof.AnotherthingthatisvisibleistheeffectoftheCovidientakeover.Afteraninitialdeclineduetotemporaryintegrationfriction,thecashflowshaverecentlygatheredpacebecauseofthelargerbusiness.
Intrinsic Value Assessment of
MEDTRONIC (MDT)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
Asonecansee,theresultsinthepasthavebeenveryimpressive,butweshoulduseaconservativeestimateofthefuturefreecashflow.Tobuildthisestimate,wemakeuseofanarrayofpotentialoutcomesforfuturecashflows.
Eachlineintheabovegraphrepresentsacertainprobabilityforoccurring.Weassumea20%chancefortheuppergrowthrateof7%peryear,a50%chancefor4%growth,anda30%chancefortheworst-casescenarioofnogrowth.ThisrathernarrowbandreflectsthefactthatMedtronicisoperatinginabusinessthatismostlyindependentoftheoveralleconomyandthatitsmarketpositionisextremelystrong.Therefore,thefutureofMedtronicisrelativelyeasytopredict–whichisahugeadvantageforinvestorstryingtoevaluatethebusiness.
Assumingthesegrowthratesandprobabilitiesareaccurate,Medtroniccanbeexpectedtogivea4.8%annualreturnatthecurrentpriceof$82.Now,let’sdiscusshowandwhythosefreecashflowscouldbeachieved.
TheCompetitiveAdvantageofMedtronicMedtronicpossessessomeuniqueadvantagesthatshouldallowittobeverysuccessfulinthefuture:
• ProductDiversification.Medtronichasbothhigh-marginproducts(likepacemakersorreplacementhips)andlower-marginoffersinitsportfolio(e.g.,itsstentbusiness).Theformercanactasafinancialbufferifthelessprofitablebusinessdeclines.DuetotheacquisitionofCovidien,Medtronicisnowamajorplayerinseveralcomplementarydevicesegments,whichfurtherboostsitsdiversification.
• EconomiesofScale.Developing,testing,andproducingmedicaldevicesrequiresavastandconnectedbusiness.Medtronicpossessesadominantmarketshareinseveralproducts.Forexample,itprovidesmorethan50%ofallimplantedcardiacpacersworldwide.Forsomeofitsproducts,Medtroniccanrelyonamorethan30-yearoldclinicalhistory.Smallerbusinessescannoteasilyreplicatethis.
• HighSwitchingCosts.Medicaldevicesareoftenuniquelydesignedbyeachcompany.Sincelearninghowtouseaspecifictypeofspineproductorartificialhiprequiresmuchexperience,training,andtime,surgeonsoftensticktotheproducttheyknow.
Intrinsic Value Assessment of
MEDTRONIC (MDT)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
• LargeUntappedFutureDemand.Peopleinboththerichandemergingworldwillbecomeevenolderandnumerous.Thisarmyofpensionersvirtuallyguaranteesanincreaseddemandformedicaldevicesinthefuture.
OpportunityCostsWhenlookingatvariousinvestingopportunitiesonthemarkettoday,let’scomparetheexpectedreturnofMedtronictootherideas.First,onecouldinvestintheten-yeartreasurybondwhichisproducinga2.4%return.Consideringthebondiscompletelyimpactedbyinflation,therealreturnofthisoptionislikelybelow1%.Currently,theS&P500ShillerP/Eratiois31.4.Asaresult,theU.S.Stockmarketispricedata3.2%yield.IfoneweretoinvestintheS&P500,theymightpurchasealow-costETFtotakeadvantageofthisreturn.
MacroFactorsMedtronic’sbusinessismostlyinsulatedfromthestateoftheeconomy.Ifyouneedaheartsurgeryorhavediabetes,youcannotwaituntiltheeconomyimproves.Thatsaid,theoverallcostintheU.S.foratotalkneereplacementcanbeabove$10,000,andapermanentcardiacpacemakercanevencost$50,000ormore.Thesehighpricesmightbelessaffordableinadownturn–nomatterhowurgentlytheyareneeded.Thisisespeciallytruebecausenotallcostsarecoveredbythehealthinsurances.
RiskFactorsThereareseveralrisksthatmightlimitthegrowthprospectsofMedtronic:
• WeakenedBalanceSheet.TheCovidienacquisitionblewahugeholeintothebalancesheet.Now,anenormousamountofalmost$40billiongoodwillispresent,andthelong-termdebthasballoonedtoover$25billion.Whilethecompanyremainsfinanciallystable,thisposesadragonitsbusiness.
• Competitors.Despiteitsextremelydominantmarketposition,Medtronicfacespressurebothfromhigh-endandlow-endcompetitors.IntuitiveSurgical(ISRG)isanexampleofahigh-endrival,whosestate-of-the-artroboticsurgicalsystemefficientlyperformsminimallyinvasivesurgeries.Medtronic’slower-marginbusinessisalsovulnerabletolow-costcompetitors.Thisisespeciallytrueinpoorercountrieswherecustomerscannoteasilyaffordcostlyproceduresandoftenchooseacheapalternative.
Intrinsic Value Assessment of
MEDTRONIC (MDT)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
SummaryMedtronicisanimpressivebusinesswithanextremelywidemoat.Despitesomechallenges,itcanbeexpectedtosuccessfullyoperateforalongtimecoming–evenmoresoaftertheacquisitionbyCovidien,whichfurtherimproveditspositionasmarketleader.Withanexpectedannualreturnof4.8%,thestockseemsfairlyvaluedtakingtheoverallvaluationofthestockmarket.
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