Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Business Elisa Suarez Gil [elisa-suarezgil@uiowa.edu] Medtronic (MDT) October 21, 2019

Health Care – Medical Devices Stock Rating Buy

Investment Thesis Target Price $140-150 We recommend a buy on Medtronic Plc (MDT) with a target price range of $140-$150 which represents an upside of 29-38% to the current price. We see potential growth across all business segments due to product launches and increasing operating margins as the company integrates business operations. Drivers of Thesis • Strong pipeline: New product launches will drive growth in the second half

of 2020 and fiscal year 2021. As a result, total revenues will grow 4.04% year over year in 2020 and 4.56% in 2021.

• Growth in emerging markets: A growing demand of medical devices in markets such as China and Latin America poses an opportunity for growth. Revenues from emerging markets as a percentage of total revenues has been growing in the past three years from 12.24% in FY2017, 14.86% in FY2018 and 15.49% in FY2019.

• Cost efficiencies: Initiatives to integrate global operations and optimize functions across business will result in operating margin improvements of 40-50bp in fiscal 2020, 2021 and 2022. It is expected total annual gross savings of more than $3.0 billion by the end of fiscal 2022 according to management1.

Risks to Thesis • Slowdown in markets: Some of Medtronic’s products are for non-elective

procedures. As a result, a slowdown in economic markets could affect our top-line projections for growth since end-consumers would postpone updating/investing in new equipment, and patients would not endure elective procedures.

• Competitive industry: The inability to deliver products superior to those of competing players could translate in Medtronic losing its advantageous position in the industry.

Henry Fund DCF $158.71 Henry Fund DDM $144.71 Relative Multiple $124.76 Price Data Current Price $108.12 52wk Range $81.66 – 112.05 Consensus 1yr Target $118.33 Key Statistics Market Cap (B) $108.12 Shares Outstanding (M) 1,342.00 Institutional Ownership 84.70% Three Year Beta 0.79 Dividend Yield 0.00% Est. 5yr Growth 7.90% Price/Earnings (TTM) 32.32 Price/Earnings (NTM) 19.15 Price/Sales (NTM) 4.63 Price/Book (NTM) 2.79 Profitability Operating Margin 23.23% Profit Margin 15.16% Return on Assets (TTM) 5.11% Return on Equity (TTM) 9.19%

Source: FactSet

Earnings Estimates Year 2017 2018 2019 2020E 2021E 2022E

HF EPS $2.92 $2.29 $3.44 $3.83 $4.22 $4.81 Growth -21.57% 50.22% 11.34% 10.18% 13.98% Consensus $3.80 $4.11 $5.20

12 Month Performance Company Description

Medtronic Plc is a global medical device company headquartered in Dublin, Ireland, after the acquisition of Covidien in 2015. The company operates in four business segments: Cardiac & Vascular, Minimally Invasive Therapies, Restorative Therapies and Diabetes. Medtronic’s primary customers include hospitals, physicians, clinicians and patients. The company generates the majority of its revenue in the U.S but has a strong presence in other developed and emerging markets such as China, Japan, Germany and India. In total, it serves 150 countries around the globe.

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EXECUTIVE SUMMARY

Medtronic offers a wide range of medical products in very diversified markets. We see the expertise and scale of its operations as a comparative advantage over other players in the industry. Promising product launches including the transcatheter aortic valve replacement (TAVR), Evolut Pro Plus, the Micra AV pacemaker and the Hugo RAS robotic platform are big value drivers for Medtronic’s future performance. These new products will allow for revenue acceleration and coupled with recent initiatives to become more cost-efficient, Medtronic will be able to generate larger free cash flows.

We value Medtronic’s ability to return value to shareholders through dividends and share repurchases. We anticipate dividends to keep growing at a historical rate of 9.61% for our near-term forecast horizon in addition to stock repurchases also in line with historical trends. We see a potential upside of 29-38% to the current stock price based which leads us to a BUY recommendation.

COMPANY DESCRIPTION

Medtronic is the largest medical device company with $30.5 billion in 2019 revenues and approximately 39.1% market share2. The company focuses on innovation with regular product releases and stays very active in mergers and acquisitions. Their primary customers include hospitals, clinics, third-party health care providers and distributors. Medtronic has a highly diversified business portfolio and currently operates in the following segments: cardiac and vascular, minimally invasive therapies, restorative therapies and diabetes. We expect

future growth to come from restorative therapies and diabetes. Below is a breakdown of the latest revenue mix.

Medtronic 10-K

Medtronic is also highly diversified geographically. It operates in more than 150 countries. Their biggest market is United States with 53% of total revenue in 2019. Following that is China which accounted for 9.8% of total revenues in 2019. Then Japan and Germany with 3.6% and 2.9% respectively. As we can observe from the graph below, Medtronic has been expanding their sales into the emerging markets for the last three years. We believe this trend will continue in the future and result in one of the drivers for revenue growth during our forecasted horizon.

Medtronic 10-K

Non-U.S. developed markets include Japan, Australia, New Zealand, Korea, Canada and the countries within Western Europe. Emerging markets include the countries of Middle East, Africa, Latin American, Eastern Europe and the countries in Asia that are not included in non-U.S. developed markets.

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Geographic Revenue Breakdown ($B)

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Cardiac and Vascular

Cardiac and Vascular provided a total revenue of $11,505 million in 2019. This business segment is comprised of three subsegments: Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic, Peripheral & Venous. We expect this segment to grow at a CAGR of 3.3% through 2024 driven by growth in TAVR offset by negative sentiment surrounding drug-coated balloons and left ventricular assist devices.

Cardiac Rhythm & Heart Failure

The biggest subsegment of Cardiac and Vascular develops products for the diagnosis, treatment and management of heart rhythm disorders and heart failure. Principal products and services offered include implantable devices, leads and delivery systems, products for the treatment of atrial fibrillation, product to reduce surgical site infections, information systems for the management of patients, ventricular assist systems and an integrated health solution business. We forecast this division to grow at a CAGR of 1.80%.

Coronary & Structural Heart

This division includes therapies to treat coronary artery disease and heart valve disorders with products such as coronary stents and related delivery systems, perfusion systems, surgical ablation products and other devices for the repair and replacement of heart valves. This market is fueled by innovation, increasing incidence of cardiovascular diseases and an increased demand for minimally invasive therapies to treat valve and artery diseases. The stent market is expected to reach $13.1 billion by 2025 with a CAGR of 6.6% from 2017 to 20253. The heart valve replacement market is expected to reach $13.4 billion by 2025, expanding at a CAGR of 10.6% from 2017 to 20254. We forecast this segment to grow at a CAGR of 5.2% over the next five years due to the drivers previously mentioned.

Aortic, Peripheral & Venous

This division focuses on the treatment of aortic diseases such as aneurysms, dissections and transections, as well as peripheral vascular disease and venous disease. Main products include endovascular stent graft systems, drug-coated balloons, stent and angioplasty systems, carotid

embolic protection systems and products for superficial venous disease. The incidence of aneurysms is expected to increase due to a global aging population, poor dietary habits and smoking. The global aortic aneurysm market was valued at 2.5 billion in 2018 and is expected to grow at a CAGR of 8.6% by 20265. Similarly, the market to treat peripheral vascular diseases is growing due to a rising prevalence of arterial diseases and technological advancements. This market is expected to reach $4.9 billion in 2023, expanding at a CAGR of 6.8%6.

For MDT, we forecast this division to grow at a CAGR of 3.6% over the next five years fueled by an increased incidence of diseases and the expansion to emerging markets.

Source: Mergent Online and HF Estimates

Minimally Invasive Therapies

The company entered this business segment through the acquisition of Covidien in 2015. Minimally Invasive Therapies accounted for $8,478 million of revenues in 2019, making it the second biggest segment. It is further divided into two subsegments: Surgical Innovations and Respiratory, Gastrointestinal & Renal. Looking forward, we believe this segment will experience most of its growth from emerging markets and an increased demand for

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minimally invasive procedures. We forecast this segment to grow at a CAGR of 4.27% through 2024.

Surgical Innovations

This subsegment encompasses surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, devices to treat hernias, and gynecology products. We forecast this division to grow at a CAGR of 5.20% by 2024.

Respiratory, Gastrointestinal & Renal

This division is represented by gastrointestinal and endoscopy products, patient monitoring, respiratory interventions and ventilation therapies, and products to treat renal diseases. We forecast this subsegment to grow at a CAGR of 2.20% over the next five years.

Source: Mergent Online and HF Estimate

Restorative Therapies

Restorative Therapies contributed $8,478 million in 2019. The segment is further divided into Spine, Brain Therapies, Specialty Therapies and Pain Therapies. We believe this segment will drive the biggest growth for Medtronic in the next five years as the company enters into the robot-assisted surgery market and launches more products in the segment.

Spine

This division offers a line of products used in the treatment of the spine and musculoskeletal system, in addition to solutions for the orthopedic and dental markets. The Spine division has been struggling in the last four years, contracting at an average rate of 2.69%. However, recent acquisitions have the potential to turn around a declining segment and make it a growing one. Medtronic has strengthened this segment with the acquisition of Mazor Robotics in December 2018 and Titan Spine in June 2019. As a result, we forecast this subsegment to grow at a CAGR of 2.3% in the next five years.

Brain Therapies

The Brain Therapies division is comprised of a portfolio of products to treat neurological disorders and diseases, as well as surgical technologies to aid in neuro procedures. We believe this segment provides a great opportunity for growth in the next five years as new products start contributing to total dollar sales. We forecast Brain Therapies to grow at a CAGR of 7.29% in the next five years driven by a strong demand for StealthStation navigation systems, O-arm imaging systems and Mazor X Stealth (co-developed with Mazor Robotics) robotic guidance systems.

Specialty Therapies

Specialty Therapies include products to treat diseases of the ear, nose and throat (ENT), pelvic health and gastric therapies, and transformative solutions for incisions and sealing of soft tissues and bones. This division is expected to grow at a CAGR of 3.40% through 2024 thanks the great momentum of the stapling devices, the ENT surgical navigation system and the new launch of a neurostimulator to help control an overactive bladder.

Pain Therapies

This division markets spinal cord simulation systems, implantable drug infusion systems for chronic pain and interventional products. This subsegment is forecasted to grow at a CAGR of 2.20% through our forecasted horizon. The growth will be driven by new product launches like the Intellis, Evolve and Control and the new data services Snapshot.

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Source: Mergent Online and HF Estimates

Diabetes

We forecast this segment to grow at a CAGR of 7.5% in the next five years due to an increased demand for smart continuous glucose monitoring systems and automated insulin pumps. This September, the company just introduced its continuous monitoring system (CGM) in Europe and gained reimbursement in Germany for the MiniMed 670G insulin pump for individuals with Type 1 diabetes. In addition, Medtronic and Novo Nordisk, a Danish pharmaceutical company, have entered into an agreement to integrate smart insulin pens from Novo Nordisk with the CGM devices from Medtronic. We believe those recent developments will help the diabetes segment become more competitive against peers.

Diabetes is on the rise everywhere across the globe. In 2017, the International Diabetes Association estimated 424.9 million diabetic people in the world. In 2045, this number is expected to reach 628.6 million people10. A growing incidence of diabetes poses an opportunity for this segment to proportionally expand.

Source: Mergent Online and HF Estimates

Margins

We expect operating margins to improve due to the company’s implementation of a program called Enterprise Excellence aimed at driving long-term growth and sustainable efficiency. In the filing, the company said the program will be focused on three categories – global operations, functional optimization and commercial optimization12. The company does not provide a lot of details on what the program entails or how it will be carried out. We intuit that they will lay down some of its workforce in areas that are not profitable in order to cut costs. These initiatives are already proving effective as MDT reported a reduction of 90 basis points in SG&A in Q1 2020. The company expects full-year operating margins to expand approximately 40 basis point on a constant-currency basis4. We have implemented those improvements on our valuation.

Pipeline

Medtronic takes pride in continually innovating their existing products, creating new therapies and disrupting existing markets. For fiscal year 2020 there will be approximately 15 launches across all four business segments. The company expects those launches to start contributing more towards the second half of fiscal year 2020 and into fiscal year 2021. New product launches are critical component to top line growth, and we believe the company has a strong pipeline to deliver good results in the next few years.

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RECENT DEVELOPMENTS

M&A Transactions

On October 10th, 2019, the company acquired AV-Medical from private American investor, Michael Tal. AV-Medical develops dialysis systems for embolectomy and PTA. The company is based in Israel and will operate as a subsidiary of Medtronic PLC. Unfortunately, we did not find information on the pricing and financing of this deal.

On June 27th, 2019, Medtronic acquired Titan Spine, Inc., who designs and manufactures interbody fusion devices for use in the cervical and lumbar spine. It is headquartered in Mecquon, Wisconsin, with a location in Germany, thus serving patients in both markets. As of June 27th, 2019, Titan Spine, Inc. operates as a subsidiary of Medtronic PLC. Unfortunately, we did not find information on the pricing and financing of this deal.

EPiX Therapeutics, Inc., formerly known as Advanced Cardiac Therapeutics, Inc, is a medical device company that develops temperature-sensing irrigated radiofrequency ablation catheters for the treatment of atrial fibrillation and other cardiac arrhythmias. It is based in Santa Clara, California and operates as a subsidiary of Medtronic PLC as of March 8th, 2019. Under the terms of transaction, Medtronic Plc paid US$216 million in cash and US$100 million in contingent payout to EPIX Therapeutics Inc.11

Q1 FY2020 Earnings Call

On August 20th, 2019, Medtronic reported strong results for its first quarter in fiscal 2020. Total revenue increased 1.5% (3.5% constant exchange rate) to $7.493 billion as compared to the same period last year, thus beating market expectations of $7.395 billion. There was a negative impact from foreign currency of $146 million. GAAP EPS came at $0.64, significantly below the $0.88 of market consensus. The stock was up following the announcement which makes us believe that investors gave more credit to non-GAAP EPS measure. Consensus was $1.18 and the company reported $1.26 non-GAAP EPS.

Cardiac and Vascular was driven by 2.6% growth in Coronary & Structural Heart (CSH) and offset by a 0.2%

decline in Aortic, Peripheral & Venous (APV) and 3.1% decline in Cardiac Rhythm & Heart Failure (CHRF).

CSH: growth in transcatheter aortic valves and decline in drug-eluting stents where the broad market is affected due to an FDA letter assessing higher mortality rates.

APV: growth in Venous and Aortic offset by Peripheral due to a decline in drug-coated balloons sales.

CHRF: growth in pacemakers, TYRX absorbable antibacterial tissue and atrial fibrillation systems offset by high forties decline in left ventricular assist devices.

Minimally Invasive Therapies increased 2.3% driven by balanced growth across Surgical Innovations (SI) and Respiratory, Gastrointestinal & Renal (RGR). Emerging markets drove 7.9% growth in this segment.

Restorative Therapies increased 3.2% due to a strong performance (9.8% growth) in Brain Therapies, 4.2% growth in Specialty Therapies, 0.9% growth in Spine and 7% decline in Pain Therapies. This decline is due to market slowdown in the spinal cord stimulation system.

Diabetes increased 3.5% led by international growth of 15.3% and offset by a decline in the U.S due to competitive pressure. Strong worldwide continuous glucose monitoring and international pump growth while MiniMed 670G Installed base expands.

Medtronic maintains its revenue guidance of 4% increase in 2020 and increases non-GAAP EPS guidance from the range of $5.44 to $5.50 to a new range of $5.54 to $5.60. Unfortunately, the company does not provide guidance on GAAP EPS. Our model forecasts 3.95% total revenue growth for 2020 which is consistent with their guidance.

INDUSTRY TRENDS

Technological Advances

We have identified a trend of consumer technology companies partnering with healthcare companies to combine data analytics and AI with medical devices. This trend is observed for the entire healthcare sector, but we will focus on the implications for the medical devices industry.

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From mobile applications that track the progression of glaucoma to robots that perform minimally invasive surgeries, the application of technology in healthcare is unlimited. Companies that want to remain competitive need to reinvent themselves and the best way to do so is partnering with tech companies that contribute the expertise.

Additive Manufacturing or 3D printing

This technology in the medical field is forecast to reach $3.5 billion by 2025, expanding at a CAGR of 17.7%7. One application is bioprinting tissues to mimic organs that can be used for research purposes or as transplants. It can also be used to create replicas of organs where surgeons can practice before a complicated operation. Another use is the creation of personalized prosthetic limbs that result in cheaper and quicker products. Body Labs is an example of a company that operates in this field and was acquired by Amazon in October 2017.

Robots

Surgery-assisting robots are able to provide better outcomes for patients by increasing precision and reducing fatigue. Intuitive Surgical developed the first robotic surgery assistant to be approved by the FDA over 18 years ago. The company has installed 4,986 da Vinci Surgical Systems as of December 20188. They systems consists of a surgeon console where the surgeon controls the instruments and views the surgical area in 3D high definition; the patient cart with the instruments and cameras; and the vision cart that supports the vision systems.

In April 2019, Johnson & Johnson acquired Auris Health and its robotic technology used in diagnostic and therapeutic procedures in the lung. This complements other robotic platforms currently under development by the product of a joint venture between Johnson & Johnson and Verily, an Alphabet subsidiary.

Medtronic entered this field this the acquisition of Mazor Robotics and is planning on launching the Hugo RAS system outside the U.S in the second half of FY2020.

Medical Imaging

The use of AI, and more specifically algorithms, to improve the speed and accuracy of medical imaging devices is

already a reality. An example is the collaboration between GE Healthcare and NVIDIA to create a computerized tomography (CT) scan that is faster and can quickly identify liver and kidney lesions from the high volume of data accessible through NVIDIA’s AI platform9.

MARKETS AND COMPETITION

Companies in this market can gain a comparative advantage by launching a product that offers higher quality and performance over others. First movers can benefit from capturing market thanks to patents and intellectual protection. Patents in the medical devices industry last for 20 years in most countries. It is also important to establish a good relationship with prospective clients (i.e. hospitals and physicians) as their perception of your brand/product is ultimately what drives sales. In this sense, bigger companies have a comparative advantage over smaller ones since they have a strong sales distribution channel with established relationships and bran recognition.

This industry is highly competitive and in constant change due to technological advances. According to IBISWorld the top four industry participants hold a combined share of 75.4% of total industry revenue in 2019, indicating a high level of industry concentration. Those top four players include Medtronic (39.1%), General Electric (16.9%), Abbott Laboratories (9.0%) and Danaher Corporation (7.0%)8. This high level of concentration among big companies is offset by a growing number of smaller firms that specialize in niche markets. A lot of innovation is initially spurred by smaller companies that can spend more time researching and incurring risky projects. Then bigger companies merge or acquire the technology in order to defend their market share.

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Source: IBISWorld

Medical devices companies are subject to high regulation by the U.S Food and Drug Administration. New efforts to shorten market approval times will benefit product launches in the future, a key driver for the growth of this industry. In addition, companies are expanding their operations to emerging markets as people become aware of new treatments and countries generate more money to invest in better healthcare. We consider this globalization an opportunity for the industry even though companies will have to abide by new regulation as products move across borders.

Peer Comparisons

There is a big number of companies operating in this industry, however, none competes across the same segments as Medtronic. As a result, it is hard to carry out a true peer comparison across players. We have chosen Abbott Laboratories (ABT), Boston Scientific Corporation (BSX) and Johnson and Johnson (JNJ) to carry out our peer comparison.

ABT’s operations include branded generic pharmaceuticals products (14.5%), adult and pediatric nutritional products (23.6%), diagnostic systems (24.5%), cardiovascular and neuromodulation (30.9%) and other (6.5%). They operate in a total of 147 countries with United States contributing to 35.4% of total revenues followed by China 7.3%, Germany 5.3% and India 4.4%.

BSX focuses on medical devices used for interventional procedures. They operate in 3 different segments: Cardiovascular (38.4%), Rhythm Management (31.0%) and Medical Surgery (30.6%). BSX sells products in over 150 countries with United States capturing 56.4% of total revenues followed by China 3.6%, Japan 3.3% and Germany 2.4%11.

JNJ’s operations include consumer (17.0%), pharmaceutical (49.9%), and Medical Devices (33.1%). Geographically, United States accounts for 51.3% of total revenues, Germany 3.9%, Japan 2.9%, China 2.9% and UK 2.7%11.

ROIC P/E NTM

EV/EBITDA NTM

ABT 4.29% 23.41 18.09 BSX 13.72% 22.03 17.24 MDT 6.22% 18.71 15.38 JNJ 17.16% 15.55 11.87

Source: FactSet

From the chart above we conclude that Medtronic is undervalued compared to ABT and BSX based on lower P/E and EV/EBITDA multiples. However, it looks more expensive than JNJ. The ROIC of 13.72% for BSX is artificially high due to the effect of tax loss carryforwards. In the last ten years, BSX has only generated positive net income in four occasions. JNJ high operating margins and ROIC can be skewed by the fact that JNJ also operates in consumer non-cyclicals which have different margins than healthcare products.

Source: FactSet

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R&D as % of Sales

Debt/EBITDA Dividend Yield

ABT 7.52% 2.75 1.5% BSX 11.33% 2.68 0.0% MDT 7.63% 2.60 1.9% JNJ 13.21% 1.08 2.8%

Source: FactSet

Over the last twelve months, ABT has performed the best with a 20% return. Not too far behind is MDT with 17% return while BSX has struggled the most and only appreciated 4%. In comparison with the S&P500 and its return of 8% over the same period, both ABT and MDT have substantially outperformed the market.

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ECONOMIC OUTLOOK

Interest Rates

Historically, a yield curve inversion has been an earlier indicator of a looming recession within the next 10 to 22 months. We have had a couple of short-term yield inversions this year, thus spurring the fear for an upcoming slowdown of the economy. One took place in March when the yield on the 3-month Treasury bill fell below the yield on the 10-year. Then, on August 14th, the yield on the 10-year fell below the yield on the 2-year.

Some people think this signal is distorted due to the global trend towards negative rates and low yield. In any way, we believe that the inversion of the yield curve reflects market’s concern about downside risk fueled by ongoing trade tensions and global slowdown.

Unemployment Rate

Source: Bureau of Labor Statistics3

The unemployment rate remains at historical lows and, as mentioned earlier, the Fed expects this number to stay at 3.7% for the rest of 2019. High employment is thought to be beneficial for the performance of the health care sector as more people have access to insurance. Health Insurance Coverage

In 2018, the number of people with health insurance coverage decreased 60 basis points when compared to 2017. The percentage of people with health insurance coverage for all or part of 2018 was 91.5 percent while the rate in 2017 was 92.1%. Conversely, 8.5% of people, or 27.5 million, did not have health insurance at any point during 2018 compared to 7.9% or 25.6 million in 201712. The graph below provides a thorough breakdown of health care coverage by type as of March 2019.

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Source: Census Bureau

The data in the graph is not conclusive as the yearly reports captures coverage at any point in time during the calendar year. The reason for providing the data as of the interview in March is because we wanted to gauge the current outlook as closely as possible. We observe that between early 2018 and early 2019, the uninsured population increased 40 basis points. This was driven by a 70 basis points decrease in Medicaid enrollment and a 40 basis point decrease in both employment-based and direct purchase plans.

CATALYSTS FOR GROWTH

Partnerships and collaborations with consumer tech companies that can provide the expertise in data analytics and AI will set a company apart in the medical devices industry. Companies will benefit from launching products together and collaborating to provide better care for patients and end-consumers.

INVESTMENT POSITIVES

• Strong pipeline and incentives to cut cost will increase operating margins and allow the company to return value to shareholders as they have proved in the past.

• Medtronic is strategically positioned in the industry with strong reputation in delivering high value products.

INVESTMENT NEGATIVES

• Poor execution in the launch of the robotic surgical platform would be detrimental to the performance of the stock as investors are anticipating a disruptive product that can compete against Intuitive Surgical.

• Slowdown in emerging markets can put too much stress on the U.S and other developed markets where pricing pressure are squeezing margins.

VALUATION

Revenue Growth

The total revenue of the firm is forecasted by different growth rates attached to each subsegment within the four main business segments. The growth rates chosen reflect future expectations on performance based on current product launches and current macroeconomic drivers, as detailed in the company description.

Operating Expenses

We forecasted COGS and R&D expense as a percentage of revenue based on a historical average of the last two and three years respectively. We do not expect R&D expense to increase above historical rates in the future. Similarly, we forecasted SG&A expenses as a percentage of revenue and implementing a 20-basis point reduction for 2020 in comparison to fiscal 2019 to reflect the effects of the Enterprise Excellence program. In addition, we took another 20-basis point reduction for 2021 and maintained that constant through the end of the forecasted horizon. As the company commented on the last earnings call, the program is intended to drive greater efficiencies across the company by leveraging the size and scale in the back offices and customer service centers.

In relation to the Enterprise Excellence program, the company expects to incur a total of $1.6 billion to $1.8 billion pre-tax restructuring charges of which the vast majority will take place by the end of fiscal year 2022. Since this plan was announced in the third quarter of fiscal year 2018, we took the $198 million charge incurred in 2019 out of the total budget and divided the rest of the cost evenly between 2020, 2021 and 2022 fiscal years. We attached a residual charge for fiscal year 2023.

Even though the company is involved in a number of legal actions, we decided not to forecast litigation charges as the company does not disclose estimated loss amounts. If we take an average of the litigation expenses in the last three years ($175million) and take that into account for our valuation, the price of Medtronic only decreases by 9 cents.

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Capital Expenditures

The company did not provide any guidance on capital expenditures therefore we decided to maintain expenses in line with historical trends. To forecast property and equipment expenses we took an average of the last four years ($1,126million) and incremented the expense by our assumed inflation rate of 1.80%.

Valuation Models

• DCF/EP=$164.62 • DDM=$145.75 • Relative P/E=$124.76

All of our models indicate that the current stock is undervalued. We place special emphasis on our DCF model since it considers all the items in the balance sheet and income statement.

WACC

We used the 10-year Treasury Bill as a proxy for the risk-free rate (1.59%) and added the product of the market risk premium of 4.95%, which is a HF consensus number based on historical data, and the 3-year weekly beta (0.79) computed on Bloomberg. This gives us a cost of equity of 5.49%. We used a pre-tax cost of debt of 3.11% that corresponds with the yield on their publicly traded bonds with a maturity of 30 years. We multiplied this number by a marginal tax rate of 15.00% to arrive to our after-tax cost of debt (2.64%).

The market value of equity is calculated by multiplying the number of outstanding shares times the share price. Whereas the market value of debt contains total debt on their balance sheet and PV of operating leases. Taking those weights and rates into consideration we arrive at a weighted average cost of capital of 5.06%.

KEYS TO MONITOR

The launch of new products and their performance versus expectations will set the pace for Medtronic’s performance in the next year and a half. If expectations are not met, we can see a decline in the stock price which will hurt our portfolio. We need to monitor the launch of the highly anticipated robot assisted surgery platform Hugo RAS and the performance of the TAVR Evolut Pro. It is also

important to keep an eye on possible acquisitions as inorganic growth has contributed to past the success of Medtronic. As previously mentioned, this industry is changing fast and Medtronic needs to stay on top of their technological advances to maintain market share and edge over other players.

REFERENCES

1. Medtronic 10-K 2. Cardiovascular Business -

https://www.cardiovascularbusiness.com/topics/coronary-intervention-surgery/cv-stents-market-expected-exceed-13b-2025

3. Credence Research - https://www.reuters.com/brandfeatures/venture-capital/article?id=105516

4. Q1 2020 Earnings Call Transcript 5. Grand View Research -

https://www.grandviewresearch.com/industry-analysis/aortic-aneurysm-market

6. Allied Market Research - https://www.globenewswire.com/news-release/2019/03/27/1774028/0/en/Peripheral-Artery-Disease-Market-Projected-to-Attain-4-9-Bn-by-2023-at-6-8-CAGR-Says-AMR.html

7. Medical Device Network - https://www.medicaldevice-network.com/features/3d-printing-in-the-medical-field-applications/

8. IBISWorld 9. EMERJ - https://emerj.com/ai-sector-overviews/ai-

medical-devices-three-emerging-industry-applications/

10. International Diabetes Federation - https://www.idf.org/aboutdiabetes/what-is-diabetes/facts-figures.html

11. FactSet

IMPORTANT DISCLAIMER

Henry Fund reports are created by students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund

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analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.

MedtronicRevenue Decomposition(in $ millions)Fiscal Years Ending April.26 2017 2018 2019 2020E 2021E 2022E 2023E 2024EREVENUESCardiac and Vascular GroupCardiac Rhythm & Heart Failure 5,649 5,947 5,849 5,907 5,996 6,146 6,269 6,394 Coronary & Structural Heart 3,113 3,562 3,730 3,917 4,151 4,401 4,621 4,805 Aortic, Peripheral & Venous 1,736 1,845 1,926 1,984 2,063 2,146 2,221 2,298

Total 10,498 11,354 11,505 11,808 12,211 12,692 13,110 13,498 Minimally Invasive Therapies GroupSurgical Innovations 5,145 5,537 5,753 6,041 6,343 6,723 7,059 7,412 Respiratory, Gastrointestinal, & Renal 4,774 3,179 2,725 2,807 2,863 2,934 2,993 3,038

Total 9,919 8,716 8,478 8,847 9,206 9,658 10,053 10,450 Restorative Therapies GroupSpine 2,641 2,668 2,654 2,707 2,775 2,858 2,915 2,973 Brain Therapies 2,098 2,354 2,604 2,864 3,122 3,403 3,607 3,824 Specialty Therapies 1,491 1,556 1,641 1,657 1,691 1,741 1,794 1,829 Pain Therapies 1,136 1,165 1,284 1,310 1,336 1,376 1,403 1,432

Total 7,366 7,743 8,183 8,539 8,923 9,378 9,720 10,058 Diabetes Group

Total 1,927 2,140 2,391 2,570 2,789 3,026 3,253 3,497 Total Revenues 29,710$ 29,953$ 30,557$ 31,764$ 33,128$ 34,754$ 36,135$ 37,504$

GROWTHCardiac and Vascular GroupCardiac Rhythm & Heart Failure 3.37% 5.28% -1.65% 1.00% 1.50% 2.50% 2.00% 2.00%Coronary & Structural Heart 0.65% 14.42% 4.72% 5.00% 6.00% 6.00% 5.00% 4.00%Aortic, Peripheral & Venous 5.98% 6.28% 4.39% 3.00% 4.00% 4.00% 3.50% 3.50%

Total 2.96% 8.15% 1.33% 2.63% 3.41% 3.94% 3.29% 2.96%Minimally Invasive Therapies Group 5.76%Surgical Innovations -2.28% 7.62% 3.90% 5.00% 5.00% 6.00% 5.00% 5.00%Respiratory, Gastrointestinal, & Renal 11.07% -33.41% -14.28% 3.00% 2.00% 2.50% 2.00% 1.50%

Total 3.72% -12.13% -2.73% 4.36% 4.05% 4.91% 4.09% 3.96%Restorative Therapies GroupSpine -9.68% 1.02% -0.52% 2.00% 2.50% 3.00% 2.00% 2.00%Brain Therapies 8.93% 12.20% 10.62% 10.00% 9.00% 9.00% 6.00% 6.00%Specialty Therapies -15.91% 4.36% 5.46% 1.00% 2.00% 3.00% 3.00% 2.00%Pain Therapies 93.53% 2.55% 10.21% 2.00% 2.00% 3.00% 2.00% 2.00%

Total 2.16% 5.12% 5.68% 4.35% 4.51% 5.10% 3.64% 3.48%Diabetes Group

Total 3.38% 11.05% 11.73% 7.50% 8.50% 8.50% 7.50% 7.50%Total Revenues 3.04% 0.82% 2.02% 3.95% 4.30% 4.91% 3.97% 3.79%

MedtronicIncome Statement(in $ millions)Fiscal Years Ending April.26 2017 2018 2019 2020E 2021E 2022E 2023E 2024ENet sales 29,710$ 29,953$ 30,557$ 31,764$ 33,128$ 34,754$ 36,135$ 37,504$ Costs and expenses:

Cost of products sold 8,357 8,246 8,260 8,481 8,879 9,210 9,858 10,231 Depreciation 937 821 895 912 953 991 1,025 1,057 Research & development expense 2,193 2,256 2,330 2,414 2,518 2,572 2,674 2,700 Selling, general & administrative 10,018 10,238 10,418 10,641 10,932 11,295 11,744 12,189 Amortization of intangibles 1,980 1,823 1,764 1,741 1,724 1,684 1,615 1,574 Restructuring charges, net 303 30 198 250 300 300 348 - Certain litigation charges 300 61 166 - - - - - Gain on sale of businesses - (697) - - - - - - Other operating expense, net 239 535 258 298 311 326 339 352

Total costs & expenses 24,327 23,313 24,289 24,737 25,617 26,378 27,603 28,103 Operating profit 5,383 6,640 6,268 7,027 7,511 8,376 8,532 9,401

Other non-operating income, net 313 181 373 373 373 373 373 373 Interest expense 1,094 1,146 1,444 668 647 686 689 670

Earnings before income taxes 4,602 5,675 5,197 5,985 6,491 7,317 7,470 8,358 Income tax provision 578 2,580 547 898 974 1,098 1,121 1,254

Net income 4,024 3,095 4,650 5,088 5,517 6,220 6,350 7,104 Net (income) loss attributable to noncontrolling interest 4 9 (19) - - - - - Net income attributable to Medtronic 4,028 3,104 4,631 5,088 5,517 6,220 6,350 7,104

Basic earnings per share 2.92$ 2.29$ 3.44$ 3.83$ 4.22$ 4.81$ 4.97$ 5.63$ Basic weighted average shares outstanding 1,379 1,357 1,346 1,327 1,309 1,292 1,277 1,262 Cash dividends declared 1.72 1.84 2.00 2.19 2.40 2.63 2.89 3.16

MedtronicBalance Sheet(in $ millions)Fiscal Years Ending April.26 2017 2018 2019 2020E 2021E 2022E 2023E 2024EASSETSCurrents assets:

Cash & cash equivalents 4,967 3,669 4,393 5,310 10,571 14,987 18,416 21,055 Investments 8,741 7,558 5,455 5,542 5,630 5,719 5,810 5,903 Accounts receivable, net 5,591 5,987 6,222 6,265 6,534 6,855 7,127 7,397 Inventories 3,338 3,579 3,753 3,755 3,916 4,109 4,272 4,434 Tax assets - - - - - - - - Prepaid expenses & other current assets 1,865 2,187 2,144 2,181 2,274 2,386 2,481 2,575 Current assets held for sale 371 - - - - - - -

Total current assets 24,873 22,980 21,967 23,052 28,925 34,055 38,106 41,362 Property, plant & equipment, net 4,361 4,604 4,675 4,889 5,081 5,257 5,419 5,571 Gross property, plant & equipment 9,691 10,259 10,920 12,046 13,191 14,358 15,545 16,754 Less accumulated depreciation 5,330 5,655 6,245 7,157 8,110 9,101 10,126 11,183 Goodwill 38,515 39,543 39,959 39,959 39,959 39,959 39,959 39,959 Other intangible assets, net 23,407 21,723 20,560 18,819 17,095 15,411 13,796 12,222 Tax assets 1,509 1,465 1,519 1,565 1,612 1,644 1,660 1,644 Other assets 1,232 1,078 1,014 1,172 1,222 1,282 1,333 1,384 Noncurrent assets held for sale 5,919 - - - - - - -

Total assets 99,816$ 91,393$ 89,694$ 89,456$ 93,895$ 97,608$ 100,273$ 102,142$ LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:

Current debt obligations 7,520 2,058 838 832 2,744 3,255 2,861 1,160 Accounts payable 1,731 1,628 1,953 1,868 1,948 2,044 2,125 2,205 Accrued compensation 1,860 1,988 2,189 2,125 2,216 2,325 2,417 2,509 Accrued income taxes 633 979 567 769 802 841 874 908 Deferred tax liabilities, net - - - - - - - - Other accrued expenses 2,442 3,431 2,925 3,097 3,230 3,389 3,523 3,657 Current liabilities held for sale 34 - - - - - - -

Total current liabilities 14,220 10,084 8,472 8,690 10,940 11,853 11,801 10,438 Long-term debt 25,921 23,699 24,486 23,683 23,240 22,842 22,514 22,234 Accrued compensation & retirement benefits 1,641 1,425 1,651 1,661 1,733 1,818 1,890 1,961 Accrued income taxes 2,405 3,051 2,838 769 802 841 874 908 Deferred tax liabilities 2,978 1,423 1,278 926 695 556 445 356 Other liabilities 1,515 889 757 1,115 1,163 1,220 1,268 1,316 Noncurrent liabilities held for sale 720 - - - - - - -

Total liabilities 49,400 40,571 39,482 36,845 38,572 39,130 38,793 37,214 Stockholders' equity:Common stock 29,551 28,127 26,532 26,915 27,299 27,682 28,065 28,449 Retained earnings 23,356 24,379 26,270 28,406 30,735 33,507 36,126 39,191 Accumulated other comprehensive loss (2,613) (1,786) (2,711) (2,711) (2,711) (2,711) (2,711) (2,711)

Total stockholders' equity 50,294 50,720 50,091 52,611 55,323 58,478 61,481 64,928 Noncontrolling interests 122 102 121 - - - - -

Total equity 50,416 50,822 50,212 52,611 55,323 58,478 61,481 64,928 Total liabities and stockholder's equity 99,816$ 91,393$ 89,694$ 89,456$ 93,895$ 97,608$ 100,273$ 102,142$

MedtronicCash Flow StatementEffect of exchange rate changes on cashFiscal Years Ending April.26 2015 2016 2017 2018 2019Operating activities:

Net income 2675 3538 4024 3095 4650Adjustments to reconcile net income to net cash:

Depreciation & amortization 1306 2820 2917 2644 2659Provision for doubtful accounts 35 49 39 52 78Deferred income taxes -926 -460 -459 -919 -304Stock-based compensation 439 375 348 344 290Loss on debt extinguishment - 163 - 38 457Gain on sale of business - - - -697 -Investment loss - - - 227 -Other, net 576 136 -128 73 257

Changes in assets and liabilities:Accounts receivable, net -413 -435 -75 -275 -581Inventories, net -282 -186 -227 -192 -274Accounts payable and accrued liabilities 1616 -65 356 65 399Other operating assets and liabilities 643 -403 85 229 -624Certain litigation charges, net 42 26 0 0 0Certain litigation payments -809 -340 0 0 0

Net cash provided by operating activities 4,902 5,218 6,880 4,684 7,007 Investing activities:

Acquisitions, net of cash acquired -14884 -1213 -1324 -137 -1827Proceeds from the sale of businesses - - - 6058 -Additions to property, plant and equipment -571 -1046 -1254 -1068 -1134Purchases of investments -7582 -5406 -4371 -3200 -2532Sales and maturities of investments 5890 9924 5356 4227 4683Other investing activities, net 89 -14 22 -22 36

Net cash used for investing activities (17,058) 2,245 (1,571) 5,858 (774) Financing activities:

Change in current debt obligations, net -1 7 906 -249 -713Issuance of long-term debt 19942 - 2140 21 7794Payments on long-term debt -1268 -5132 -863 -7370 -7948Dividends to shareholders -1337 -2139 -2376 -2494 -2693Issuance of ordinary shares 649 491 428 403 992Repurchase of ordinary shares -1920 -2830 -3544 -2171 -2877Other financing activities -116 60 26 -94 14

Net cash used in financing activities 15,949 (9,543) (3,283) (11,954) (5,431) Effect of exchange rate changes on cash -353 113 65 114 -78Net increase (decrease) in cash & cash equivalents 3,440 (1,967) 2,091 (1,298) 724 Cash & cash equivalents at beginning of year 1,403 4,843 2,876 4,967 3,669 Cash & cash equivalents at end of year 4,843$ 2,876$ 4,967$ 3,669$ 4,393$

MedtronicCash Flow Statement(in $ millions)Fiscal Years Ending April.26 2020E 2021E 2022E 2023E 2024EOperating activities:

Net income 5,088 5,517 6,220 6,350 7,104 Adjustments to reconcile net income to net cash:

Add depreciation 912 953 991 1,025 1,057 Add amortization 1,741 1,724 1,684 1,615 1,574 Change in deferred taxes (397) (279) (171) (128) (72)

Changes in assets and liabilities:Accounts receivable (43) (269) (321) (272) (270) Inventories (2) (161) (192) (163) (162) Prepaid expenses & other assets (37) (94) (112) (95) (94) Accounts payable (85) 80 96 81 80 Accrued compensation (64) 91 109 92 92 Accrued income taxes(ST and LT) (1,868) 66 79 67 66 Other accrued expenses 172 133 159 135 133 Accrued compensation and retirement benefits 10 71 85 72 72 Other liabilities 358 48 57 48 48 Other assets (158) (50) (60) (51) (50)

Net cash flows from operating activities 5,627 7,832 8,622 8,776 9,578 Investing activities:

(Increase) decrease of investments (87) (88) (90) (91) (92) Purchases of property & equipment (1,126) (1,146) (1,166) (1,187) (1,209)

Net cash flows used for investing activities (1,212) (1,234) (1,256) (1,278) (1,301) Financing activities:

Changes in current portion of long-term debt (6) 1,912 511 (394) (1,701) Change in LT debt (803) (444) (397) (328) (280) Repurchases of common stock 383 383 383 383 383 Dividend payments (2,951) (3,189) (3,448) (3,731) (4,040) Noncontrolling interests (121) - - - - Changes in AOCI - - - - -

Net cash flows from financing activities (3,498) (1,337) (2,950) (4,069) (5,638) Net increase (decrease) in cash & cash equivalents 917 5,261 4,416 3,429 2,639 Cash & cash equivalents at beginning of year 4,393 5,310 10,571 14,987 18,416 Cash & cash equivalents at end of year 5,310 10,571 14,987 18,416 21,055

MedtronicCommon Size Income Statement

Fiscal Years Ending April.26 2017 2018 2019 2020E 2021E 2022E 2023E 2024ENet sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Costs and expenses:

Cost of products sold 28.13% 27.53% 27.03% 26.70% 26.80% 26.50% 27.28% 27.28%Depreciaition 3.15% 2.74% 2.93% 2.87% 2.88% 2.85% 2.84% 2.82%Research & development expense 7.38% 7.53% 7.63% 7.60% 7.60% 7.40% 7.40% 7.20%Selling, general & administrative 33.72% 34.18% 34.09% 33.50% 33.00% 32.50% 32.50% 32.50%Amortization of intangibles 6.66% 6.09% 5.77% 5.48% 5.20% 4.85% 4.47% 4.20%Restructuring charges, net 1.02% 0.10% 0.65% 0.79% 0.91% 0.86% 0.96% 0.00%Certain litigation charges 1.01% 0.20% 0.54% 0.00% 0.00% 0.00% 0.00% 0.00%Gain on sale of businesses 0.00% -2.33% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other operating expense, net 0.80% 1.79% 0.84% 0.94% 0.94% 0.94% 0.94% 0.94%

Total costs & expenses 81.88% 77.83% 79.49% 77.88% 77.33% 75.90% 76.39% 74.93%Operating profit 18.12% 22.17% 20.51% 22.12% 22.67% 24.10% 23.61% 25.07%Other non-operating income, net 1.05% 0.60% 1.22% 1.17% 1.13% 1.07% 1.03% 0.99%Interest expense 3.68% 3.83% 4.73% 2.10% 1.95% 1.97% 1.91% 1.79%Earnings before income taxes 15.49% 18.95% 17.01% 18.84% 19.59% 21.05% 20.67% 22.29%Income tax provision 1.95% 8.61% 1.79% 2.83% 2.94% 3.16% 3.10% 3.34%Net income 13.54% 10.33% 15.22% 16.02% 16.65% 17.90% 17.57% 18.94%Net (income) loss attributable to noncontrolling interest 0.01% 0.03% -0.06% 0.00% 0.00% 0.00% 0.00% 0.00%Net income attributable to Medtronic 13.56% 10.36% 15.16% 16.02% 16.65% 17.90% 17.57% 18.94%

MedtronicCommon Size Balance Sheet

Fiscal Years Ending April.26 2017 2018 2019 2020E 2021E 2022E 2023E 2024EASSETSCurrents assets:

Cash & cash equivalents 16.72% 12.25% 14.38% 16.72% 31.91% 43.12% 50.96% 56.14%Investments 29.42% 25.23% 17.85% 17.45% 16.99% 16.46% 16.08% 15.74%Accounts receivable, net 18.82% 19.99% 20.36% 19.72% 19.72% 19.72% 19.72% 19.72%Inventories 11.24% 11.95% 12.28% 11.82% 11.82% 11.82% 11.82% 11.82%Tax assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses & other current assets 6.28% 7.30% 7.02% 6.87% 6.87% 6.87% 6.87% 6.87%Current assets held for sale 1.25% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total current assets 83.72% 76.72% 71.89% 72.57% 87.31% 97.99% 105.45% 110.29%Property, plant & equipment, net 14.68% 15.37% 15.30% 15.39% 15.34% 15.13% 15.00% 14.85%Gross property, plant & equipment 32.62% 34.25% 35.74% 37.92% 39.82% 41.31% 43.02% 44.67%Less accumulated depreciation 17.94% 18.88% 20.44% 22.53% 24.48% 26.19% 28.02% 29.82%Goodwill 129.64% 132.02% 130.77% 125.80% 120.62% 114.98% 110.58% 106.55%Other intangible assets, net 78.78% 72.52% 67.28% 59.25% 51.60% 44.34% 38.18% 32.59%Tax assets 5.08% 4.89% 4.97% 4.93% 4.86% 4.73% 4.59% 4.38%Other assets 4.15% 3.60% 3.32% 3.69% 3.69% 3.69% 3.69% 3.69%Noncurrent assets held for sale 19.92% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total assets 335.97% 305.12% 293.53% 281.63% 283.43% 280.85% 277.50% 272.35%LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:

Current debt obligations 25.31% 6.87% 2.74% 2.62% 8.28% 9.37% 7.92% 3.09%Accounts payable 5.83% 5.44% 6.39% 5.88% 5.88% 5.88% 5.88% 5.88%Accrued compensation 6.26% 6.64% 7.16% 6.69% 6.69% 6.69% 6.69% 6.69%Accrued income taxes 2.13% 3.27% 1.86% 2.42% 2.42% 2.42% 2.42% 2.42%Deferred tax liabilities, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other accrued expenses 8.22% 11.45% 9.57% 9.75% 9.75% 9.75% 9.75% 9.75%Current liabilities held for sale 0.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total current liabilities 47.86% 33.67% 27.73% 27.36% 33.02% 34.11% 32.66% 27.83%Long-term debt 87.25% 79.12% 80.13% 74.56% 70.15% 65.73% 62.31% 59.29%Retained earnings (accumulated deficit) 78.61% 81.39% 85.97% 89.43% 92.78% 96.41% 99.98% 104.50%Accumulated other comprehensive loss -8.80% -5.96% -8.87% -8.53% -8.18% -7.80% -7.50% -7.23%

Total stockholders' equity 169.28% 169.33% 163.93% 165.63% 167.00% 168.26% 170.14% 173.13%Noncontrolling interests 0.41% 0.34% 0.40% 0.00% 0.00% 0.00% 0.00% 0.00%

Total equity 169.69% 169.67% 164.32% 165.63% 167.00% 168.26% 170.14% 173.13%Total liabities and stockholder's equity 335.97% 305.12% 293.53% 281.63% 283.43% 280.85% 277.50% 272.35%

MedtronicWeighted Average Cost of Capital (WACC) Estimation

Cost of EquityRisk-free rate 1.59%Market risk premium 4.95%Beta 0.79Cost of Equity (Re) = 5.49%

Cost of DebtPre-tax cost of debt 3.11%Marginal tax rate 15.00%After-tax Cost of Debt (Rd) = 2.64%

Market Value of EquityShares outstanding 1,346 Share price $108.42Market Value of Equity (E) = 145,957

Market Value of Debt Short-term debt 838Long-term debt 24,486PV of operating leases 600 Total Value of Debt (D) = 25,924

Total Value of the Firm (D+E) = 171,882

WACC = 5.06%

MedtronicValue Driver Estimation(in $ millions)Fiscal Years Ending April.26 2017 2018 2019 2020E 2021E 2022E 2023E 2024ENOPLATEBITA CalculationOperating revenue 29,710 29,953 30,557 31,764 33,128 34,754 36,135 37,504 - COGS 8,357 8,246 8,260 8,481 8,879 9,210 9,858 10,231 - Depreciation 937 821 895 912 953 991 1,025 1,057 - Research & development 2,193 2,256 2,330 2,414 2,518 2,572 2,674 2,700 - Selling, general & administrative 10,018 10,238 10,418 10,641 10,932 11,295 11,744 12,189 - Amortization of intangibles 1,980 1,823 1,764 1,741 1,724 1,684 1,615 1,574 - Other operating expense, net 239 535 258 298 311 326 339 352 + Implied interest on operating leases 16 19 22 19 19 20 21 21 EBITA 6,002 6,053 6,654 7,296 7,830 8,696 8,900 9,422

Adjusted TaxesIncome Tax Provision 578 2,580 547 898 974 1,098 1,121 1,254 - Tax shield on other non-operating income 47 27 56 56 56 56 56 56 - Tax on gain on sale of business - 105 - - - - - - - Tax on restructuring charges, net 45 5 30 38 45 45 52 - - Certain litigation charges 45 9 25 - - - - - + Tax on other expense 164 172 217 100 97 103 103 100 - Tax on operating lease interest 2 3 3 3 3 3 3 3 Total Adjusted Taxes 602 2,604 650 902 967 1,097 1,113 1,295

NOPLAT CalculationEBITA 6,002 6,053 6,654 7,296 7,830 8,696 8,900 9,422 - Adjusted Taxes 602 2,604 650 902 967 1,097 1,113 1,295 + Change in Deferred Taxes (180) (1,511) (199) (397) (279) (171) (128) (72) NOPLAT 5,219 1,938 5,805 5,996 6,585 7,428 7,660 8,054

INVESTED CAPITALOperating current assets:Normal cash 594 599 611 635 663 695 723 750 Accounts receivable 5,591 5,987 6,222 6,265 6,534 6,855 7,127 7,397 Inventories 3,338 3,579 3,753 3,755 3,916 4,109 4,272 4,434 Prepaid expenses 1,865 2,187 2,144 2,181 2,274 2,386 2,481 2,575 Total operating CA 11,388 12,352 12,730 12,836 13,387 14,044 14,602 15,155

Operating current liabilities:Accounts payable 1,731 1,628 1,953 1,868 1,948 2,044 2,125 2,205 Accrued compensation 1,860 1,988 2,189 2,125 2,216 2,325 2,417 2,509 Accrued income taxes 633 979 567 769 802 841 874 908 Other accrued expenses 2,442 3,431 2,925 3,097 3,230 3,389 3,523 3,657 Total operating CL 6,666 8,026 7,634 7,858 8,196 8,598 8,940 9,278

Net working capital 4,722 4,326 5,096 4,977 5,191 5,446 5,662 5,877

Net PPE 4,361 4,604 4,675 4,889 5,081 5,257 5,419 5,571

Other LT operating assetsOther intangible assets 23,407 21,723 20,560 18,819 17,095 15,411 13,796 12,222 PV of operating leases 598 694 600 610 637 663 685 707 Total LT operating assets 24,005 22,417 21,160 19,429 17,732 16,074 14,481 12,929

Other LT operating liabilitiesAccrued compensation & retirement benefits 1,641 1,425 1,651 1,661 1,733 1,818 1,890 1,961 Accrued income taxes 2,405 3,051 2,838 769 802 841 874 908 Total LT operating liabilities 4,046 4,476 4,489 2,430 2,534 2,659 2,764 2,869

IC CalculationNet operating WC 4,722 4,326 5,096 4,977 5,191 5,446 5,662 5,877 + Net PPE 4,361 4,604 4,675 4,889 5,081 5,257 5,419 5,571 + Other LT operating assets 24,005 22,417 21,160 19,429 17,732 16,074 14,481 12,929 - Other LT operating liabilities 4,046 4,476 4,489 2,430 2,534 2,659 2,764 2,869 Invested Capital 29,042 26,871 26,442 26,865 25,471 24,118 22,799 21,508

ROIC (NOPLAT/Beg. IC) 16.18% 6.67% 21.60% 22.68% 24.51% 29.16% 31.76% 35.33%

FCF (NOPLAT- change in IC) 8,431 4,108 6,234 5,574 7,979 8,781 8,979 9,346

Economic Profit (Beg. IC*(ROIC-WACC)) 3,587 468 4,445 4,658 5,225 6,139 6,440 6,901

MedtronicDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.00% CV ROIC 35.33% WACC 5.06% Cost of Equity 5.49%

Fiscal Years Ending April.26 2020E 2021E 2022E 2023E 2024E

DCF ModelPeriod 1 2 3 4 5NOPLAT 5,996 6,585 7,428 7,660 8,054 - Capital Expenditures 422 (1,394) (1,353) (1,319)Free Cash Flow (FCF) 5,574 7,979 8,781 8,979 CV 248274Discount Factor 1.1 1.1 1.2 1.2PV of FCF 5,305 7,229 7,572 211,156 Total Value of Operating Assets 231,262

+ Investments 5,455 + Excess Cash 3,782 + Other assets 1,014 - Other liabilities 757 - Underfunded Pension Plan (1,099) - Total Debt (25,324) - PV of Operating Leases (600) - PV of ESOP (1,113) Value of Equity 214,133 Shares Outstanding 1,346 Intrinsic Value 159.06$ Partial Year Adjusted Value 164.62$

EP ModelPeriod 1 2 3 4 5Economic Profit to Discount 4,658 5,225 6,139 6,440 6,901 CV 225,475 Discount Factor 1.1 1.1 1.2 1.2PV of EP 4,434 4,734 5,294 190,358 Total PV 204,820 + Beginning IC 26,442 Total Value of Operating Assets 231,262

+ Investments 5,455 + Excess Cash 3,782 + Other assets 1,014 - Other liabilities 757 - Underfunded Pension Plan (1,099) - Total Debt (25,324) - PV of Operating Leases (600) - PV of ESOP (1,113) Value of Equity 214,133 Shares Outstanding 1,346 Intrinsic Value 159.06$ Partial Year Adjusted Value 164.62$

MedtronicDividend Discount Model (DDM) or Fundamental P/E Valuation ModelKey Assumptions CV growth 2.00% CV ROE 10.94% Cost of Equity 5.49%

Fiscal Years Ending April.26 2020E 2021E 2022E 2023E 2024E

EPS 3.83$ 4.22$ 4.81$ 4.97$ 5.63$

Future Cash FlowsPeriod 1 2 3 4 5P/E Multiple (CV Year) 23.41 EPS (CV Year) 5.63 Future Stock Price 131.78 Dividends Per Share 2.19 2.40 2.63 2.89 3.16

Discounted Cash Flows 2.1$ 2.3$ 2.5$ 2.7$ 131.78$

Intrinsic Value 141.37$ Partial Year Adjusted Value 145.75$

MedtronicRelative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2019E 2020E P/E 19 P/E 20 EPS gr. PEG 20 PEG 21BSX Boston Scientific Corporation$38.14 $0.97 $1.36 39.3 28.0 11.96 3.29 2.34 BDX Becton Dickinson $253.10 $5.76 $9.12 43.9 27.8 9.93 4.43 2.79 JNJ Johnson and Johnson $128.02 $7.75 $8.28 16.5 15.5 5.96 2.77 2.59 SYK Stryker Corp $215.46 $6.38 $7.87 33.8 27.4 10.39 3.25 2.63 ABT Abbott Laboratories $81.77 $2.15 $2.62 38.0 31.2 11.81 3.22 2.64 ZBH Zimmer Biomet Holding $136.38 $4.46 $5.63 30.6 24.2 5.69 5.37 4.26

Average 33.7 25.7 3.7 2.9

MDT Medtronic $108.42 $ 3.70 $ 4.09 29.3 26.5 7.98 3.7 3.3

Implied Value: Relative P/E (EPS19) $ 124.76 Relative P/E (EPS20) 104.97$ PEG Ratio (EPS19) 109.99$ PEG Ratio (EPS20) 93.91$

MedtronicKey Management Ratios

Fiscal Years Ending April.26 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Liquidity RatiosCurrent Assets 24,873 22,980 21,967 23,052 28,925 34,055 38,106 41,362 /Current Liabilities 14,220 10,084 8,472 8,690 10,940 11,853 11,801 10,438 = Current Ratio 1.75 2.28 2.59 2.65 2.64 2.87 3.23 3.96

Cash + Accounts Receivable 10,558 9,656 10,615 11,575 17,105 21,841 25,543 28,451 / Curent Liabilities 14,220 10,084 8,472 8,690 10,940 11,853 11,801 10,438 = Quick Ratio 0.74 0.96 1.25 1.33 1.56 1.84 2.16 2.73

Cash Assets 4,967 3,669 4,393 5,310 10,571 14,987 18,416 21,055 / Current Liabilities 14,220 10,084 8,472 8,690 10,940 11,853 11,801 10,438 = Cash Ratio 0.35 0.36 0.52 0.61 0.97 1.26 1.56 2.02

Activity or Asset-Management RatiosTotal Revenue 29,710 29,953 30,557 31,764 33,128 34,754 36,135 37,504 / Average Accounts Receivable 5,577 5,789 6,105 6,243 6,399 6,694 6,991 7,262 = Average Recivable Turnover 5.33 5.17 5.01 5.09 5.18 5.19 5.17 5.16

Cost of Goods Sold 8,357 8,246 8,260 8,481 8,879 9,210 9,858 10,231 / Average Inventory 3,406 3,459 3,666 3,754 3,836 4,013 4,190 4,353 = Inventory Turnover 245.40% 238.43% 225.31% 225.92% 231.46% 229.53% 235.25% 235.04%

Financial Leverage RatiosTotal Debt 33,441 25,757 25,324 24,515 25,984 26,097 25,375 23,394 / Total Assets 99,816 91,393 89,694 89,456 93,895 97,608 100,273 102,142 = Debt Ratio 0.34 0.28 0.28 0.27 0.28 0.27 0.25 0.23

Long-term debt 25,921 23,699 24,486 23,683 23,240 22,842 22,514 22,234 / Total SE 50,294 50,720 50,091 52,611 55,323 58,478 61,481 64,928 = Debt to Equity Ratio 0.52 0.47 0.49 0.45 0.42 0.39 0.37 0.34

Profitability RatiosSales-COGS 21,353 21,707 22,297 23,283 24,250 25,544 26,277 27,273 / Sales 29,710 29,953 30,557 31,764 33,128 34,754 36,135 37,504 = Gross Margin 71.87% 72.47% 72.97% 73.30% 73.20% 73.50% 72.72% 72.72%

Operating Income 7,966 7,857 8,396 9,018 9,535 10,360 10,495 10,975 / Sales 29,710 29,953 30,557 31,764 33,128 34,754 36,135 37,504 = Operating Margin 26.81% 26.23% 27.48% 28.39% 28.78% 29.81% 29.04% 29.26%

Net Income 4,028 3,104 4,631 5,088 5,517 6,220 6,350 7,104 / Sales 29,710 29,953 30,557 31,764 33,128 34,754 36,135 37,504 =Net Profit Margin 13.56% 10.36% 15.16% 16.02% 16.65% 17.90% 17.57% 18.94%

Net Income 4,024 3,095 4,650 5,088 5,517 6,220 6,350 7,104 / Average Total Assets 99,799 95,605 90,544 89,575 91,675 95,752 98,941 101,208 = Return on Assets 4.03% 3.24% 5.14% 5.68% 6.02% 6.50% 6.42% 7.02%

Net Income 4,024 3,095 4,650 5,088 5,517 6,220 6,350 7,104 / Average Total Equity 51,240 50,619 50,517 51,351 53,967 56,901 59,980 63,205 = Return on Equity 7.85% 6.11% 9.20% 9.91% 10.22% 10.93% 10.59% 11.24%

Payout Policy RatiosDividend 1.72 1.84 2.00 2.19 2.40 2.63 2.89 3.16 / EPS 2.92$ 2.29$ 3.44$ 3.83$ 4.22$ 4.81$ 4.97$ 5.63$ = Dividend Payout Ratio 58.90% 80.35% 58.14% 57.18% 57.01% 54.72% 58.04% 56.22%

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 32Average Time to Maturity (years): 5.91Expected Annual Number of Options Exercised: 5

Current Average Strike Price: 71.52$ Cost of Equity: 5.49%Current Stock Price: $108.42

2020E 2021E 2022E 2023E 2024EIncrease in Shares Outstanding: 5 5 5 5 5Average Strike Price: 71.52$ 71.52$ 71.52$ 71.52$ 71.52$ Increase in Common Stock Account: 383 383 383 383 383

Change in Treasury Stock 2,668 2,668 2,668 2,668 2,668Expected Price of Repurchased Shares: 108.42$ 114.37$ 120.65$ 127.28$ 134.27$ Number of Shares Repurchased: 25 23 22 21 20

Shares Outstanding (beginning of the year) 1,346 1,327 1,309 1,292 1,277Plus: Shares Issued Through ESOP 5 5 5 5 5Less: Shares Repurchased in Treasury 25 23 22 21 20 Shares Outstanding (end of the year) 1,327 1,309 1,292 1,277 1,262

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol MDTCurrent Stock Price $108.42Risk Free Rate 1.59%Current Dividend Yield 2.06%Annualized St. Dev. of Stock Returns 19.44%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 32 71.52 5.91 35.14$ 1,113$ Total 32 71.52$ 5.91 45.76$ 1,113$

Present Value of Operating Lease Obligations (2019) Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017)

Operating Operating OperatingFiscal Years Ending April.26 Leases Fiscal Years Ending April.26 Leases Fiscal Years Ending April.26 Leases2020 216 2019 234 2018 2152021 157 2020 182 2019 1582022 103 2021 133 2020 1102023 61 2022 87 2021 702024 34 2023 43 2022 41Thereafter 81 Thereafter 74 Thereafter 52Total Minimum Payments 652 Total Minimum Payments 753 Total Minimum Payments 646Less: Interest 52 Less: Interest 59 Less: Interest 48PV of Minimum Payments 600 PV of Minimum Payments 694 PV of Minimum Payments 598

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.11% Pre-Tax Cost of Debt 3.11% Pre-Tax Cost of Debt 3.11%Number Years Implied by Year 6 Payment 2.4 Number Years Implied by Year 6 Payment 1.7 Number Years Implied by Year 6 Payment 1.3

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 216 209.5 1 234 227.0 1 215 208.52 157 147.7 2 182 171.2 2 158 148.63 103 94.0 3 133 121.3 3 110 100.44 61 54.0 4 87 77.0 4 70 61.95 34 29.2 5 43 36.9 5 41 35.26 & beyond 34 66.0 6 & beyond 43 60.9 6 & beyond 41 43.1PV of Minimum Payments 600.3 PV of Minimum Payments 694.3 PV of Minimum Payments 597.7

Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating OperatingFiscal Years Ending April.26 Leases Fiscal Years Ending April.26 Leases2017 180 2016 1962018 130 2017 1382019 90 2018 932020 56 2019 662021 33 2020 43Thereafter 55 Thereafter 88Total Minimum Payments 544 Total Minimum Payments 624Less: Interest 42 Less: Interest 52PV of Minimum Payments 502 PV of Minimum Payments 572

Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.11% Pre-Tax Cost of Debt 3.11%Number Years Implied by Year 6 Payment 1.7 Number Years Implied by Year 6 Payment 2.0

Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment1 180 174.6 1 196 190.12 130 122.3 2 138 129.83 90 82.1 3 93 84.84 56 49.6 4 66 58.45 33 28.3 5 43 36.96 & beyond 33 45.3 6 & beyond 43 72.1PV of Minimum Payments 502.2 PV of Minimum Payments 572.2

WACC Beta164.62$ 4.65% 4.75% 4.85% 4.94% 5.05% 5.15% 5.25% 164.62$ 1.40 1.50 1.60 1.66 1.80 1.90 2.00 11.00% 201.06 193.31 186.10 180.04 173.11 167.23 161.71 3.95% 83.71 77.37 71.84 69.04 62.64 58.76 55.2812.00% 198.78 191.12 183.99 177.99 171.14 165.32 159.87 4.15% 83.30 77.02 71.53 68.75 62.39 58.55 55.0813.00% 196.51 188.93 181.88 175.95 169.17 163.42 158.02 4.35% 82.90 76.67 71.22 68.46 62.15 58.33 54.8914.00% 194.23 186.74 179.77 173.90 167.20 161.51 156.17 4.55% 82.50 76.32 70.92 68.18 61.91 58.11 54.6915.00% 191.96 184.55 177.66 171.85 165.23 159.60 154.33 4.75% 82.10 75.97 70.61 67.89 61.67 57.90 54.5016.00% 189.69 182.36 175.54 169.81 163.26 157.70 152.48 4.95% 81.70 75.63 70.31 67.61 61.43 57.69 54.3117.00% 187.41 180.17 173.43 167.76 161.28 155.79 150.63 5.15% 81.31 75.29 70.01 67.33 61.20 57.47 54.1218.00% 185.14 177.98 171.32 165.72 159.31 153.88 148.78 5.35% 80.92 74.95 69.72 67.06 60.96 57.26 53.9319.00% 182.86 175.79 169.21 163.67 157.34 151.97 146.94 5.55% 80.54 74.62 69.42 66.78 60.73 57.05 53.7420.00% 180.59 173.60 167.10 161.62 155.37 150.07 145.09 5.75% 80.16 74.29 69.13 66.51 60.50 56.85 53.5521.00% 178.32 171.41 164.98 159.58 153.40 148.16 143.24 5.95% 79.78 73.96 68.84 66.24 60.27 56.64 53.3622.00% 176.04 169.22 162.87 157.53 151.43 146.25 141.39

Inflation Rate Risk-free Rate164.62$ 1.50% 1.60% 1.70% 1.80% 1.90% 2.00% 2.10% 2.20% 164.62$ 1.40% 1.50% 1.60% 1.69% 1.80% 1.90% 2.00%

1.80% 174.67 174.64 174.61 174.58 174.55 174.52 174.49 174.46 0.20 1226.84 1022.32 875.94 775.73 680.36 611.80 555.661.90% 173.87 173.84 173.81 173.78 173.75 173.72 173.69 173.66 0.30 614.94 558.26 511.04 474.80 436.84 407.17 381.212.00% 173.07 173.04 173.01 172.98 172.95 172.92 172.89 172.86 0.40 408.59 382.46 359.41 340.87 320.61 304.13 289.212.10% 172.28 172.25 172.22 172.19 172.16 172.13 172.10 172.07 0.50 304.94 289.96 276.34 265.11 252.52 242.05 232.382.20% 171.49 171.46 171.44 171.41 171.38 171.35 171.32 171.29 0.60 242.58 232.88 223.89 216.36 207.79 200.55 193.772.29% 170.79 170.77 170.74 170.71 170.68 170.65 170.62 170.59 Beta 0.70 200.93 194.13 187.76 182.36 176.15 170.84 165.832.40% 169.95 169.92 169.89 169.86 169.83 169.80 169.77 169.75 0.79 174.25 169.05 164.14 159.94 155.08 150.90 146.922.50% 169.18 169.15 169.13 169.10 169.07 169.04 169.01 168.98 0.90 148.75 144.88 141.19 138.03 134.33 131.12 128.062.60% 168.43 168.40 168.37 168.34 168.31 168.28 168.26 168.23 1.00 131.32 128.24 125.30 122.76 119.78 117.19 114.702.70% 167.68 167.65 167.62 167.59 167.56 167.53 167.51 167.48 1.10 117.35 114.85 112.45 110.37 107.91 105.77 103.702.80% 166.93 166.90 166.87 166.85 166.82 166.79 166.76 166.73 1.20 105.91 103.84 101.84 100.10 98.04 96.24 94.502.90% 166.19 166.17 166.14 166.11 166.08 166.05 166.02 166.00 1.30 96.36 94.61 92.92 91.45 89.70 88.16 86.67

Risk-premium

Pre-tax Cost of Debt

Marginal Tax Rate