Medtronic PLC (MDT, Financial) is a global medical device manufacturer that has leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets. Shares of the company were volatile in Thursday’s trading after reporting better-than-expected earnings for its fiscal second quarter of the fiscal year 2016.
Beats estimates by 3 cents, revenue in line
Earnings per share decreased by 57% to 36 cents per share compared to 83 cents per share in the same period the year before. Excluding special items, the adjusted earnings came in at $1.03 per share, beating estimates by 3 cents. Further, revenue rose 61.7% year over year to $7.058 billion, in line with estimates.
In the press release, Omar Ishrak, Medtronic chairman and chief executive officer, said, “Q2 was another strong quarter. Our above-market revenue growth remains robust and consistent, and, we believe, sustainable across our groups and regions. We are steadily executing our plan and meeting our expectations while at the same time building a foundation for long-term, dependable revenue growth and EPS leverage.”
Moreover, the company has updated its revenue outlook and diluted non-GAAP EPS guidance. Based on its performance in the first semester, the company now expects the fiscal year 2016 adjusted EPS to be in the range of $4.33 to $4.40. Despite the fact that this number includes a negative foreign currency effect, it is higher than the previous outlook of $4.30 to $4.40 per share.
Good and severe signs
GuruFocus gives us the opportunity to know both positive and negative signals. The company´s dividend yield is close to a two-year high, and it is ranked higher than 64% of the 187 companies in the Global Medical Devices industry. The recent dividend increase of 38 cents per share quarterly, a 25% increase, was announced in June.
On the other hand, the gross margin has been in long-term decline. The average rate of decline per year is -1.6%. As a consequence, the operating margin has the same negative trend. The average rate of decline per year is -4.5%. Medtronic builds assets at 18.4% a year, faster than its revenue growth rate of 5.2% over the past five years, a sign of inefficiency.
Strong stock price evolution
The stock price is close to a 10-year high and is selling at a premium. The P/E ratio as of Dec. 4 is 32.23x, which is higher than the industry median of 28.20x. The stock is trading near its 52-week high, and it has surged 7.8% in a year-to-date basis and 5.3% in the past 12 months.
Catalysts
The Covidien (COV, Financial) acquisition has two positive effects. First of all, it allows the company to expand its reach. Secondly, it permits the diversification of its products. Operations in emerging markets, such as China and Latin America, are crucial and should drive growth higher in the future.
Final comment
The dividend increase discussed previously constitutes the 38th consecutive year increase and had experienced continued growth for the past 15 years. Further, the good stock price performance makes me feel bullish on this stock.
Hedge fund gurus have also been active in the company in Q3 2015. Hedge fund managers Jim Simons (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio), have initiated new positions in the stock with 531,441; 151,700 and 10,247 shares. Further, Manning & Napier Advisors Inc. has started a stake with 2,671,920 shares.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
