Medtronic Inc: $MDT Cash Flow Valuation Update

Current Price: ~ $38/share
Projected Yield: ~ 2.74%


One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and spinal fixation devices. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 41% of the company's total sales.

Estimated WACC for the firm today is 8.86% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2003	1698
2004	2421
2005	2367
2006	963
2007	2285
2008	2883
2009	3215
2010	3496
2011	3193
2012	3971

Average Annual Growth FCF: ~ 20%

CAGR FCF: ~ 10%

Consensus Forecast Industry 5-Year Growth: ~ 18% per year

Consensus Forecast Company 5-Year Growth: ~ 5% per year

Internal Growth Rate: ~ 9%

Sustainable Growth Rate: ~ 19%

Scenario 1
Average FCF (2012, 2011, 2010) is $3553 million

• Start at $3553 million FCF
• Assume a 5-year growth rate in FCF of 5% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	3553
1	3731
2	3917
3	4113
4	4319
5	4535
Terminal Value	53712

The firm's future cash flows, discounted at a WACC of 8.86%, give a present value for the entire firm (Debt + Equity) of $51087 million. If the firm's fair value of debt is estimated at $9965 million, then the fair value of the firm's equity could be $41122 million.  $41122 million / 1030 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 8% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	3553
1	3837
2	4144
3	4476
4	4834
5	5221
Terminal Value	63603

• Present Value of the entire firm (Debt + Equity): $58942 million
• Value of Equity: $48977 million or $48/share
• 20% margin of safety is $38/share

Sources

Morningstar.com

Yahoo! Finance

Medtronic.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Medtronic Inc: $MDT cash flow valuation update

Current Price: ~ $39/share
Projected Yield: ~ 2.50%



One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and spinal fixation devices. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 41% of the company's total sales.     

I estimated the firm's WACC today at 8.27% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2002	1204
2003	1698
2004	2421
2005	2367
2006	963
2007	2285
2008	2883
2009	3215
2010	3496
2011	3193
TTM	3713

Average Annual Growth FCF: ~ 22%

CAGR FCF: ~11%

Consensus Forecast Industry 5-Year Growth: ~ 16% per year

Consensus Forecast Company 5-Year Growth: ~ 7% per year

Starting at $3193 million FCF, assuming the company achieves a 5-year growth rate in FCF of 7% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	3193
1	3417
2	3656
3	3912
4	4185
5	4478
Terminal Value	57973

The firm's future cash flows, discounted at a WACC of 8.27%, give a present value for the entire firm (Debt + Equity) of $54388 million. If the firm's fair value of debt is estimated at $10300 million, then the fair value of the firm's equity could be $44088 million.  $44088 million / 1060 million outstanding shares is approximately $42 per share and a 20% margin of safety is $33/share.

Sources

Morningstar.com

Yahoo! Finance

Medtronic.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Medtronic Inc: fairly valued at $41/share

I believe Medtronic, Inc. ($MDT), at approximately $41/share is fairly valued on a cash flow valuation basis.  Assuming all else at $MDT meets my standard for good business, I'd buy it today for the long term at $34.

One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and artificial spinal discs. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 41% of the company's total sales.

I estimated the firm's WACC at 10.48% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2001	1392
2002	1204
2003	1698
2004	2421
2005	2367
2006	963
2007	2285
2008	2883
2009	3380
2010	3558
TTM	3876

Average Annual Growth: approx. 22%
CAGR: approx. 11%
Consensus Forecast Industry 5-Year Growth: approx. 17% per year
Consensus Forecast Company 5-Year Growth: approx. 9% per year

Assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $ Millions
0	3876
1	4225
2	4605
3	5020
4	5471
5	5964
Terminal Value	62022

The firm's future cash flows, discounted at a WACC of 10.48%, give a present value for the entire firm (Debt + Equity) of $56,295 million. If the firm's fair value of debt is estimated at $11,075 million, then the fair value of the firm's equity could be $45,220 million.  $45,220 million / 1070 million outstanding shares is approximately $42 per share and a 20% margin of safety is $34. Assuming all else at $MDT meets my standard for good business, I'd buy it today for the long term at $34.

Sources
Morningstar.com

Medtronic.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.