Here is a look at how Medtronic (MDT) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $76.87 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $49.06 |
| Value Based on 0% Growth | $28.76 |
| Market Implied Growth Rate | 4.20% |
| Net Current Asset Value (NCAV) | $1.76 |
| PEmg | 16.90 |
| Current Ratio | 3.54 |
| PB Ratio | 3.05 |
Balance Sheet - 10/31/2013
| Current Assets | $19,483,000,000 |
| Current Liabilities | $5,496,000,000 |
| Total Debt | $9,637,000,000 |
| Total Assets | $36,468,000,000 |
| Intangible Assets | $13,072,000,000 |
| Total Liabilities | $17,724,000,000 |
| Outstanding Shares | 998,350,000 |
Earnings Per Share
| 2014 (estimate) | $3.82 |
| 2013 | $3.37 |
| 2012 | $3.22 |
| 2011 | $2.86 |
| 2010 | $2.79 |
| 2009 | $1.93 |
| 2008 | $1.95 |
| 2007 | $2.41 |
| 2006 | $2.09 |
| 2005 | $1.48 |
| 2004 | $1.60 |
| 2003 | $1.3 |
Earnings Per Share - Modern Graham
| 2014 (estimate) | $3.38 |
| 2013 | $3.05 |
| 2012 | $2.78 |
| 2011 | $2.50 |
| 2010 | $2.30 |
| 2009 | $2.02 |
Conclusion:
From a fundamentals side of things, Medtronic is an outstanding company. In fact, the only requirement of either the Defensive Investor or the Enterprising Investor that the company does not fulfill is the requirement that the PB ratio be less than 2.5. Every other requirement, from a strong dividend history to a strong current ratio, is fulfilled and the company is therefore suitable for either investor type. From a valuation standpoint, the company is also very attractive and appears to be undervalued at the current time. EPSmg (normalized earnings) have grown from $2.02 in 2009 to an estimated $3.38 for 2014, and while this is not a huge level of growth, it outpaces the market's current implied estimate of 4.2%. In addition, the earnings growth has been very consistent, rising by around thirty cents each year, which is a very nice thing to see (consistency is a key ingredient in successful investing). Defensive Investors and Enterprising Investors should feel very comfortable continuing with further research, perhaps beginning with a review of ModernGraham's Valuation of Johnson & Johnson (here).
Disclaimer: The author did not hold a position in Medtronic, Inc. (MDT) at the time of publication and had no intention of entering into a position within the next 72 hours.
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