Medtronic PLC (MDT ) is one of the largest medical device companies in the world. Medtronic operates from more than 370 locations in approximately 160 countries. Its goals are to create medical technology that alleviates pain, restores health and extends life for millions of people around the world.
In 2014, Medtronics purchased the Ireland-based company Covidien PLC for $42.9 billion, thus, doing a tax inversion, putting itself (now based out of Ireland) at a considerably lower (at the time) corporate tax rate of 12.5%. Since the acquisition, Medtronic has benefited from the acquisition, giving the company a more global reach.
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For 2018, Medtronic has gotten off to a great start and is up around 8.04%. However, for the trailing one-year, the stock is up only 1.04%, with most of the gains coming in the last three months. For the longer term, Medtronic has performed averagely, with a total return of nearly 70% for the trailing five-years. Outside of the year-to-date figure, the S&P 500 has outperformed Medtronic in both the trailing one-year and five-year returns of 14.12% and 70.86%, respectively.
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Over the last five years, Medtronic has had an excellent growth average for its revenue, with a very high 12.9% measure. In fact, Medtronic has not seen a negative year in that time, with its stand out years being 2015 and 2016, with increases of 19.1% and 42.3%, respectively. These years were the first time the Covidien PLC purchase finally hit the balance sheets, showing immediate gains right off the bat. Recently, Medtronic wrapped up its fiscal 2018 (July 2017 to April 2018), reporting $30 billion in revenues, which represented an increase of less than 1%. However, with the 2019 estimates, analysts expect Medtronic to see revenues of $32.0 billion, up 4.50%.
However, when it comes to its earnings, Medtronics is a different story. Over the last five years, MDT has had a negative 2.1% average annual earnings growth rate. The company struggled from 2013 to 2015, where it was dealing with efficiency problems with integrating Covidien. However, 2016 and 2017 were both in the positive, with increases of 2.9% and 16.5%, respectively. As of the third quarter of 2018, Medtronic saw a loss of $1.03 per share, which was due to the one-time $2.2 billion net charge from the recent tax reform in the U.S. tax laws. On May 24, 2018, Medtronics announced that during the fourth quarter of 2018 its diluted GAAP EPS stood at $1.07 per share, making 2018 total equal to $2.27 per share. The non-GAAP EPS for 2018 was reported at $4.77. This is equal to a 24% dropoff but is attributed to the one-time tax bill and negative earnings from the third quarter. For 2019, MDT is expected to gain back strength and report a non-GAAP EPS of $5.16, representing an 8.2% increase over its 2018 numbers.
Medtronic’s strength is that its business is well diversified and not solely dependent on one area, as all areas saw organic growth of 4.6% for the year.
The company is broken down into four sectors: the Cardiac and Vascular Group, the Minimally Invasive Therapies Group, the Restorative Therapies Group and the Diabetes Group. As of 2018, the Cardiac and Vascular Group represented 38% of total revenues, equal to $11.3 billion, which grew 6% on a year-over-year basis and can be attributed to a 13% growth in the Coronary and Structural Heart segment, which was driven by TAVR (Transcatheter Aortic Valve Replacement) and DES (Drug Eluting Stent).
The Minimally Invasive Therapies Group, which saw a 4% revenue growth, represents 29% of revenues equaling $8.7 billion. This was thanks to the growth in the Advanced Energy and Stapling area in the Surgical Innovations segment.
The Restorative Therapies Group saw an increase of 4% to $7.7 billion due to large growth in both the neurovascular and spinal cord stimulation therapies.
Finally, the Diabetes Group had the largest growth at 9%, with revenues of $2.1 billion. This growth was supported by the huge surge in the MiniMed 670g hybrid closed-loop insulin plug, which saw an increase of over 25% in 2018. With such a diverse business, Medtronics is potentially sheltered from any real declines in one segment.
Another major strength of Medtronic is its salesforce, which helps increase its staying power with doctors, and essentially increases the switching costs for doctors. The sales reps play a major part in the delivery and application of Medtronic’s medical products, where physicians often rely on the education and application methods provided to them by the reps. Doctors end up relying on these implementation and maintenance techniques for these products, making Medtronic’s sales reps almost as valuable as the devices themselves.
Medtronic’s growth comes from the fact that its sales are global, and not solely focused on sales within the United States. As of 2018 year-end, 53% of its sales came from the United States, while 32% came from non-U.S. developed countries and 15% came from emerging markets.
A place with a lot of upside potential is Medtronic’s exposure in China, where it has generated around $1.59 billion in sales as of 2017. Back in 2012, Medtronic made a conscious effort to increase its exposure in China by acquiring Kanghui Holdings for $816 million. This acquisition has helped Medtronic by providing an established network of native distributors that can reach thousands of Chinese hospitals.
Medtronic is so invested in China that it recently broke ground on the Chengdu Innovation Center at the Singapore-Sichuan Hi-Tech Innovation Park in Sichuan province. The facility is set to open in 2020 and will provide a leading, cross-disciplinary clinical training and research platform for medical workers in Sichuan and other central and western regions.
Medtronic stock has a yield of 2.13%, which is a higher yield than the Best Medical Appliances & Equipment Dividend Stocks average of 0.69%. The company pays its shareholders $1.84 per share on an annual basis. Medtronic also has a wonderful history of raising its dividend every year since 1978, for 40 years in a row. With revenues seeing growth in its fiscal 2018, expect MDT to maintain its dividend-increase history.
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The biggest risk for Medtronic comes from the potential for Medicare reimbursements to be cut for device-related procedures. Baby boomers are entering Medicare, thus, a large percentage of the U.S. population is no longer on private insurance and will be heavily reliant on the government-funded health provider. With such a big percentage of the population under its care, Medicare has the power to dictate its reimbursement amounts to its vendors.
The Bottom Line
Medtronic has been on the right track over the last few years with its increasing revenues and earnings. WIth its controversial acquisition of Covidien finally panning out to direct revenue growth, Medtronic is seeing growth in terms of its stock price. More importantly, the stock is due for another dividend hike, which could mark its 41st consecutive raise in a row.
With such a consistent history of dividends as well as a stable and diverse portfolio of medical devices, expect Medtronic stock to see new all-time highs at over $100 per share.