At the beginning of my career in the financial industry, I was a licensed rep for one of the largest mutual fund and discount brokerage companies in North America. Looking over the mutual funds that we offered, and digging into their respective investment philosophies was something I found to be really fascinating. It wasn’t just about which stocks they were holding; I really enjoyed trying to understand the method each one followed to identify a stock it wanted to be part of its portfolio. We ran dozens of different funds, and it wasn’t uncommon to find many of the same stocks in any number of them; but it was really cool to figure out how those stocks fit into the criteria each fund used. That was really where I started to cut my teeth on fundamental analysis and to start thinking not only about the metrics that were commonly used, but also the data that drove them, like earnings, debt, free cash flow, and so on.
One of the ideas that was starting to become popular was “socially responsible” investing. It sounded interesting, so when my company announced the launch of a new socially responsible mutual fund, I started digging into it. As a generally conservative-minded person, some of the ideas frankly didn’t appeal to me very much; at the time, the bent was a little too far-left side of socially active-driven causes for my personal preferences. I can’t say that I’ve necessarily become more moderate or liberal as the years have passed; but it is interesting that the “socially responsible” idea means something different, to me at least, than it did in those early years.
I think that, no matter how objective an investor tries to be, there is always a tendency to impose our own set of values on the investments we make. It’s one of the reasons that over the years, there are certain publicly traded companies that I simply have not bothered to do much with. I don’t smoke or chew tobacco, for example, mostly because in my youth I saw enough of the damaging effects nicotine has on people I cared out and respected to permanently squash any level of interest I might have had to giving either one a try. The vivid imagery of those memories, I’m pretty sure is a big reason I just don’t care to invest in, or even analyze tobacco companies.
I think that the natural bias we each have, in one way or another towards certain aspects of the society we live in is something that we can channel into an investing style that, at least for each of us individually, reflects our social sensibilities. This morning, watching market news sparked something along these lines for me. The CEO of Medtronic PLC (MDT) was interviewed for his unique perspective on what is much more than just a U.S.-driven concern right now – but something that I’m not sure a lot of people outside of the healthcare industry are aware of. MDT makes a wide variety of medical equipment, and in the last couple of days Tesla (TSLA) announced that they were repurposing a portion of their operations to help MDT manufacture one of the ventilators they provide to hospitals all over the world.
Ventilators are an important piece of equipment hospitals need to treat respiratory illnesses, especially for intensive care units. In the U.S., the entire state of New York is experiencing a severe shortage of hospital beds – ICU and otherwise compared to what they are forecasting they will need in the very near term to handle the volume of COVID-19 cases. New York isn’t the only locale that is experiencing this problem, or others in keeping hospitals properly supplied, not only to treat patients, but also to provide proper protective measures to the incredible professionals that are taking care of them. MDT is working to ramp up their ventilation production as quickly as possibly, and their partnership with TSLA is a move to give them increased capacity at a time it is urgently needed. The story piqued my interest, not only as it relates to to COVID-19 but the healthcare industry in general. Investing in MDT is probably a good, socially responsible way to put your money to work in a company with terrific fundamentals. Is a good value as well? Let’s find out.
Fundamental and Value Profile
Medtronic Public Limited Company (Medtronic) is a medical technology and services company. The Company develops, manufactures and markets its medical devices and technologies to hospitals, physicians, clinicians and patients in approximately 160 countries. The Company operates in four segments: Cardiac and Vascular Group, Minimally Invasive Technologies Group, Restorative Therapies Group and Diabetes Group. The Cardiac and Vascular Group segment includes Cardiac Rhythm & Heart Failure, Coronary & Structural Heart and Aortic & Peripheral Vascula. Its Minimally Invasive Technologies Group segment includes Surgical Solutions and Patient Monitoring and Recovery. Its Restorative Therapies Group segment includes Spine, Neuromodulation, Surgical Technologies and Neurovascular. Its Diabetes Group segment includes Intensive Insulin Management, Non-Intensive Diabetes Therapies and Diabetes Services & Solutions. The Company’s subsidiaries include Medtronic, Inc. and HeartWare International, Inc. MDT has a current market cap of about $75.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 11.63%, while revenues improved by 2.27%. In the last quarter, earnings improved almost 10%, with revenues mostly flat. MDT is a company that operates with a healthy, improving margin profile; in the last twelve months, Net Income was 17.11% of Revenues, and increased to 24.8% in the last quarter. This is a useful sign of strength that is likely to offer good support for the strength of their balance sheet, even if things slow down in the next couple of quarters.
Debit/Equity: MDT’s debt to equity ratio is .48, which is conservative. Their balance sheet shows $11.6 billion in cash and liquid assets, with $24.7 billion in long-term debt. Their operating profile is a strong indication that servicing their debt is no problem, with excellent liquidity to work with as well.
Free Cash Flow: MDT’s free cash flow is $6.65 billion over the last year. This number has increased steadily from around $3.6 billion in April of 2018 and translates to a current Free Cash Flow yield of 6.18%.
Dividend: MDT’s annual divided is $2.16 per share and translates to a yield of 2.69% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $98 per share, which means that MDT is somewhat undervalued, with about 16% upside from its current price. Social sensibilities aside, that means that MDT is an interesting value, and if broad market momentum fails to picks up bullish steam from U.S. government-led stimulus in the last couple of days, it could get compelling in pretty short order.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s recent, overriding downward trend. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. From a peak a little above $122 in late January of this year, the stock has dropped back sharply, hitting a recent support low around $72 last week. It has rebounded nicely from that point, and appears to be gaining bullish momentum in the last few days; I think that investors are anxious for reasons to be optimistic, and the announcement of a $2 trillion stimulus package by Congress overnight, with a pretty substantial amount of of that being directed to hospitals and the healthcare system looks like a near-term catalyst. Immediate resistance is around $92, inline with the 38.2% retracement line, with further upside if bullish momentum drives past that point to anywhere between $99 and $103, based on previous pivot points as well as the 61.8% retracement line. If the stock does reverse and start to move lower, immediate support should be around $83.50 based on pivots seen about a year ago; but a push below that point, there is about $11 of downside from that point to the recent pivot low support at around $72.
Near-term Keys: I think MDT is a terrific example of the kind of stock that is smart to buy when broad market and economic conditions are uncertain; the company has excellent liquidity, manageable debt, and an efficient operating model. They are also in an industry that is being directly challenged by current health concerns that are outstripping capacity, and that is something that could keep the stock’s volatility high in the near term. I think the value proposition is attractive, but could get better – if you don’t mind dealing with that potential volatility. If you prefer to work with short-term trading strategies, a break above $92 could offer an excellent opportunity to buy the stock, or to work with call options with an eye on $99 to $103 as a bullish price target. A break below $83, on the other hand could offer an interesting signal to consider shorting the stock or working with put options, using a target between $75 and $72 as a useful exit point on a bearish trade.
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