On Sept. 28, the Food and Drug Administration approved for sale Medtronic’s MiniMed 670G device.
MiniMed 670G combines two devices that attach to the outside of the body—a pump that delivers insulin through a tiny tube inserted under the skin and a sensor that monitors blood glucose levels, according to the Wall Street Journal. The device tries to perform as a type 1 diabetic patient’s pancreas.
Normally, the human body only has one functioning pancreas. This organ is part of the human digestive system, whereby it secretes several hormones, such as insulin, that allows the body to use sugar (glucose) from carbohydrates in the food that was eaten for energy or to store glucose for future use.
In type 1 diabetes, the pancreas does not produce insulin. Type 1 diabetes is usually diagnosed in children and young adults and was previously known as juvenile diabetes. Only 5% of people with diabetes have this form of the disease. Therefore, glucose regulation homeostasis can rarely be achieved without external insulin administration, which is critical to prolong life.
Although the MiniMed 670G device is not fully automated just yet, experts still consider this a breakthrough. As a result, Medtronic’s shares closed up 0.08% that day, while the broader S&P 500 index closed up 0.53%.
Market performance
In the past five years, Medtronic had a total return of 23%, while the broader index provided 15.6% (1). Year to date, Medtronic rose 13.4% while the latter returned 7.5%.
Valuations
Medtronic had a trailing 12-month price-earnings multiple of 32.4 times (the industry median is 27), price-book multiple of 2.29 times (the industry median is 3.66) and price to sales multiple of 4.13 times (the industry median the 3.46; 2). The $119 billion medical device company also had a trailing 12-month dividend yield of 1.95% with a 61% payout ratio.
(Medtronic, company overview)
Medtronic
Medtronic was founded in 1949 and is currently headquartered in in Dublin, Ireland (3). Medtronic is among the world's largest medical technology, services and solutions companies - alleviating pain, restoring health and extending life for millions of people around the world.Â
(Medtronic, Annual Filing)
In fiscal 2016, 57% of Medtronic’s total sales came from the U.S., followed by non-U.S. developed countries (30%) and emerging markets (13%).
In January 2015, Medtronic successfully completed its $49.9 billion acquisition of Covidien. Covidien was a global leader in the development, manufacture and sale of health care products for use in clinical and home settings and had net sales of $10.7 billion in fiscal year 2014.
"The culmination of this acquisition marks a significant milestone in our industry, creating a company uniquely positioned to alleviate pain, restore health and extend life for more patients around the world. We can now bring together the extensive and innovative capabilities of both Medtronic and Covidien with an underlying objective to solve healthcare's biggest challenge - expanding access and improving clinical outcomes, while lowering costs."
"This is an exciting day for our employees as we officially join forces to pursue our shared commitment to addressing universal healthcare needs and accelerating Medtronic's three fundamental strategies of therapy innovation, globalization and economic value. We know that our combined businesses can have a real and meaningful impact on people's lives - helping to treat more people, in more ways and in more places around the world."
Omar Ishrak, chairman and CEO of Medtronic (Jan. 26, 2015;Â Source)
In fiscal 2015, Medtronic had four business segments: Cardiac and Vascular Group (35.3% of total sales or $10.2 billion), Minimally Invasive Therapies Group (33.2%), Restorative Therapies Group (24.9%) and Diabetes Group (6.6%; 4).
(Medtronic, Annual Filing)
These four segments are further divided into subgroups (5):
A. Cardiac and Vascular Group: Cardiac Rhythm & Heart Failure; Coronary & Structural Heart; Aortic & Peripheral Vascular.
In FISCAL YEAR 2016 (7), Cardiac and Vascular Group contributed 35.4% of total Medtronic sales and grew by 8.9% to $10.2 billion. The segment had an operating margin of 31.2% (highest among the four groups).
In first quarter 2017, the segment contributed 35.1% to total Medtronic sales while it had delivered -2% sales growth to $2.5 billion and an operating margin of 26.1%.
B. Minimally Invasive Therapies Group: Surgical Solutions; Patient Monitoring & Recovery.
In FISCAL YEAR 2016, Minimally Invasive Therapies Group contributed 33.2% to total sales and grew by 300.6% to $9.56 billion (8). The segment also had an operating margin of 14.6%.
In first quarter 2017, the segment contributed 33.8% to total sales while growing -1% on sales year on year. The segment also had an operating margin of 11.7% for the period.
C. Restorative Therapies Group: Spine, Neuromodulation, Surgical Technologies and Neurovascular.
In FISCAL YEAR 2016, Restorative Therapies Group contributed 25% to total Medtronic sales and grew by 6.8% to $7.2 billion. The segment had an operating margin of 27.4%.
In first quarter 2017, Restorative Therapies Group contributed 24.7% to total sales and grew by -2% to $1.77 billion. The segment had 28.6% for its operating margin.
D. Diabetes Group: Intensive Insulin Management, Non-Intensive Diabetes Therapies and Diabetes Service & Solutions.
In FISCAL YEAR 2016, the Diabetes group contributed 6.5% (lowest among the four segments) to overall sales with a 5.8% sales growth to $1.86 billion and an operating margin of 29.1%.
In first quarter 2017, Diabetes group contributed 6.3% to total sales with a 2% year on year sales growth to $452 million. The segment also had an operating margin of 24.8%.
For first quarter 2017, Medtronic delivered a sales and profit growth of -1.5% and +13.3%, respectively. Medtronic’s sharesclosed that day with -1.45% share pricereturn, while the broader S&P 500 index closed -0.14%.
Overall, Medtronic had a five-year sales and profit average of 12.59% and 2.7%, respectively.
(One of Medtronic’s Thoracolumbar Products: CD Horizon Solera System; Video)
Competitors per segment
According to Medtronic, its business operations tackle several competitors accordingly:
Cardiac and Vascular Group: St. Jude Medical Inc. (St. Jude), Boston Scientific Corporation (Boston Scientific), Sorin Group (Sorin), Edwards Lifesciences Corporation (Edwards), C.R. Bard Inc. (Bard) and Abbott Laboratories (Abbott).
Minimally Invasive Therapies Group: Johnson & Johnson, Boston Scientific, Baxter International Inc. and Bard.
Restorative Therapies Group: Johnson & Johnson, Boston Scientific, St. Jude, Stryker Corporation (Stryker), NuVasive Inc. and Zimmer Holdings Inc. (Zimmer).
Diabetes Group: Johnson & Johnson, DexCom Inc., TandemDiabetes Care Inc., Insulet Corporation and F. Hoffmann-La Roche Ltd.
Cash, debt and book value
As of July 29, Medtronic had total cash and cash equivalents of $3.06 billion. The company also had $32.07 in total debt with a debt-to-equity multiple of 0.63. Medtronic also had 68.7% of its total assets ($98.6 billion) in goodwill and intangibles with a book value of $50.89 billion.
Cash flow
(Medtronic Cash Flow, Quarterly Filing; 9)
In first quarter 2017, Medtronic grew its cash flow from operations by 90% to $1.55 billion. This growth was brought positive changes in Medtronic’s Deferred income taxes, other operating assets and liabilities and certain litigation charges.
(Read Medtronic’s litigation information on page 24 onwards:Â first quarter 2017 Filing)
Medtronic also spent $330 million in capital expenditures leaving it with $1.3 billion in free cash flow. Observably, Medtronic had also spent $1 Billion in investment purchases. The medical device company also took in $926 million in debt while reducing it by $17 million.
Medtronic also provided $2.36 Billion in dividends and share repurchases or 178% of its free cash flow.
For the past three years (FISCAL YEAR 2014 to FISCAL YEAR 2016), Medtronic spent 91.57% of its free cash flow in dividends and buybacks.
Conclusion
Medtronic has an observable extensive moat surrounding its several lines of businesses. The company had a five-year operating margin average of 22.5. Medtronic also has provided its shareholders bountiful free cash flow over the years and has outperformed the broader market by almost twice over recent years.
The medical device company also has not rested in its growing business overtime, but has been actively acquiring business, such as Covidien, to further expand its reach in the field while maintaining a healthy balance sheet.
Nonetheless, Medtronic’s shares seem to trade at a good earnings multiple premium compared to its peers and I would value the company at $57 a share (9). In summary, Medtronic is a HOLD.
Notes
(1) Morningstar data.
(2) GuruFocus data.
(3) Annual filing.
(4) Covidien’s operations are included in Medtronic’s Minimally Invasive Therapies Group.
(5) Annual filing, further subgroup.
A.. Cardiac and Vascular Group
1. Cardiac Rhythm & Heart Failure Disease Management (CRHFD): this division develops, manufactures and markets products for the diagnosis, treatment and management of heart rhythm disorders and heart failure.
The CRHFD included the following principal products and services: Implantable Cardiac Pacemakers (Pacemakers), Implantable Cardioverter Defibrillators (ICDs), Implantable Cardiac Resynchronization Therapy Devices (CRT-Ds and CRT-Ps), AF Products, Diagnostics and Monitoring Device, TYRX Products and Services and Solution.
2. Coronary & Structural Heart (CSH): this division includes therapies to treat coronary artery disease (CAD) and heart valve disorders.
CSH included the following products: TranscatheterHeart Valves(TCVs), Percutaneous CoronaryIntervention (PCI) and Heart Surgery. Medtronic offers a complete line of surgical valve replacement and repair products for damaged or diseased heart valves.
3. Aortic & Peripheral Vascular Disease Management (APV): this division is comprised of a comprehensive line of products and therapies to treat aortic disease (such as aneurysms, dissections and transections) as well as peripheral vascular disease (PVD) and critical limb ischemia (CLI).
APV included the following products: Endovascular Stent Grafts (Aortic), Peripheral Vascular Intervention (PVI) and EndoVenous (EV).
B. Minimally Invasive Group
1. Surgical Solutions: this division develops, manufactures and markets advanced surgical, general surgical and hernia products and therapies to treat diseases and conditions that are typically, but not exclusively, addressed by surgeons.
Surgical Solutions has the following principal products: Surgical Innovations and Early Technologies.
2. Patient Monitoring & Recovery (PMR): this division develops, manufactures and markets products and therapies to enable complication-free recovery to enhance patient outcomes.
PMR has the following principal products: Patient Monitoring, Airway &Ventilation, Nursing Care and Patient Care & Safety (PCS).
C. Restorative Therapies Group
1. Spine: this division develops, manufactures and markets a comprehensive line of medical devices and implants used in the treatment of the spine and musculoskeletal system.
Spine has the following principal products: Thoracolumbar products, Cervical Products, Biologic Products and Interventional Products.
3. Neuromodulation: this division includes implantable neurostimulation and targeted drug delivery systems for the management of chronic pain, common movement disorders, spasticity and urologic and gastrointestinal disorders.
Neuromodulation has the following principal products: Neurostimulation Systems for Chronic Pain, Implantable Drug Infusion Systems, Deep Brain Stimulation (DBS) Systems and Gastroenterology & Urology (Gastro/Uro) Systems.
4. Surgical Technologies: this division develops, manufactures and markets products and therapies to treat diseases and conditions of the ear, nose and throat (ENT) and certain neurological disorders.
Surgical technologies have the following principal products: Neurosurgery, ENT and Advanced Energy.
5. Neurovascular: this division, develops, manufactures and markets products and therapies to treat diseases of the vasculature in and around the brain.
Neurovascular has the following principal products: Pipeline and Pipeline Flex Embolization Devices, Solitaire FR revascularization device and Apollo Onyxdelivery micro catheter.
D. Diabetes Group: this group consisted of three divisions, Intensive Insulin Management, Non-Intensive Diabetes Therapies and Diabetes Service & Solutions.
Diabetes Group has the following principal products: Integrated Diabetes Management Solutions (such as the MiniMed Systems), Professional CGM, Connected Care and CareLink Therapy Management Software.
(6) Annual Filing.
(7) Medtronic’s FISCAL YEAR 2016 ended in April 29, 2016.
(8) Assumed to be brought by Covidien’s acquisition/integration to Medtronic’s business operations.
(9) Using five-year earnings multiple multiplied with five-year profit growth rate.
Disclosure:Â I do not own any shares in Medtronic.
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