Student Investment Fund Stock Report Analysts: Cheng Xi, Amanda Repp and Jamie Coonce
HIGHLIGHTS MDT is the world’s largest medical
technology company.
The analysts' consensus long term expected growth rate for MDT is 11%.
MDT has shown its ability to generate an average 10.4% growth in revenue growth over the past 5 years. Even in an economic recession, MDT increased its sales by 9.9% in 2008.
With a 2.4% dividend yield, MDT has recorded 32 years of uninterrupted dividend payments, and 22 consecutive years of increasing dividend payments.
MDT continues to focus its strategies on innovation and diversification.
Medtronic Inc. NYSE: MDT
Recommendation: Buy Market Cap: $32.49B
Recent Price: $32.16 (05/01/09) Target Price: $61.54
Industry: Medical Appliances and Equipment Sector: Healthcare
BUSINESS SUMMARY Medtronic, Inc. is the world’s largest independent medical technology company. Medtronic develops, manufactures, and markets therapeutic medical devices for chronic diseases worldwide. Medtronic operates in six main business segments including: Cardiac Rhythm Disease Management, Spinal and Biologics, CardioVascular, Neuromodulation, Diabetes, and Surgical Technologies. MDT successfully implements their global market strategy by offering rapid, cost-effective delivery of high-quality products to a diverse group of customers worldwide and continues to focus on expanding their geographic reach.
INVESTMENT THESIS Selection of MDT was based on:
Bottom-up approach of stock screening, focusing on a particular set of strong key statistics: ROIC, Dividend Yield, Earnings Momentum, Earnings Growth, and FCF generation.
Top-down approach of macroeconomic theme: ˗ MDT’s ability to grow revenues and profits during the
global economic downturn. ˗ An aging customer demographic base continues to increase
the demand for medical technologies worldwide. ˗ MDT’s ability to set itself apart from its competitors by
focusing on R&D, innovation, diversification.
FINANCIAL STATISTICS VS. SELECTED COMPETITORS & INDUSTRY
Metric MDT SYK ZMH Industry S&P 500
5‐year revenue growth 10.4% 13.7% 8.4% N/A N/A
R&D to sales 2008 9.4% 5.5% 4.7% N/A N/A
5‐year Gross Margin 74.96% 68.20% 76.47% 65.8% 39.1%
5‐year Operating Margin 26.14% 20.43% 29.28% 15.1% 16.7%
5‐year Net Margin 19.61% 14.24% 20.95% 9.3% 11.6%
5‐year ROIC 38.70% 35.38% 38.86% 12.40% 11.4%
5 Year ROE 21.42% 18.18% 15.11% 9.8% 8.4%
Dividend Yield 2.40% 1.10% 0.00% 1.75% N/A
PRICE PERFORMANCE VS. S&P 500
MDT
Medtronic, Inc. Xi Cheng, Jamie Coonce, Amanda Repp
Business Segments
Cardiac Rhythmic Disease Management (36% of 2008 sales) provides products for heart rhythm therapies including: implantable pacemakers, implantable cardioverter-defibrillators (ICDs), and heart monitoring systems. MDT recently acquired CryoCath Technologies Inc. in 2008 for $380M, a former competitor in the cardiac business segment. MDT holds the leading market position among implantable cardiac rhythm device manufacturers.
Sales of $4.9 billion for 2008. Segment had 2% growth from 2007 to 2008.
Spinal and Biologics (22% of 2008 sales) offers products for spinal and musculoskeletal therapies including: minimal access spine technologies (MAST), artificial cervical discs, and infuse bone grafts. Their Spinal business is a leading supplier for innovative medical devices and implants used in the treatment of the spine. MDT recently acquired Kyphon Inc. in 2007 for $4.2B, a previous global leader in minimally invasive spinal therapies.
Sales of $3 billion for 2008. Segment had 23% growth from 2007 to 2008.
Cardiovascular (16% of 2008 sales) provides products for cardiovascular specialty therapies including: angioplasty technologies, heart valves and valve repair technologies, and open-heart and coronary bypass graft products. In early 2009, MDT acquired Albation Frontiers and Ventor Technologies, for $700M and $325M respectively. Both companies were competitors in the heart valve sector of this segment.
Sales of $2.1 billion for 2008. Segment had 12% growth from 2007 to 2008.
Neuromodulation (10% of 2008 sales) provides neurostimulation systems and implantable drug delivery systems including: deep brain stimulation, pain therapies, and RF prostate therapies. This segment also offers treatment systems for neurological, urological, and gastroenterological disorders.
Sales of $1.3 billion in 2008. Segment had 11% growth from 2007 to 2008.
Diabetes (7% of 2008 sales) offer diabetes management systems including: advanced insulin delivery systems, continuous glucose monitoring devices, and data management software. MDT is the world leader in integrated diabetes management systems, insulin pump therapies, continuous glucose monitoring systems, and therapy management software.
Sales of $1 billion for 2008. Segment had 18% growth from 2007 to 2008.
Surgical technologies (9% of 2008 sales) provide surgical navigation and intra-operative imaging systems for use in neurosurgeries, spinal surgeries, and joint replacements. MDT is an innovative market leader in developing, manufacturing, and marketing products and therapies to treat diseases and conditions of the ear, nose and throat (ENT).
Sales of $1.2 billion for 2008. Segment had 17% growth from 2007 to 2008.
Medtronic, Inc. Xi Cheng, Jamie Coonce, Amanda Repp
Innovation as a Strategy
Medtronic participates in an industry where its technology is subject to rapidly advancing changes. In order to maintain leadership in these markets, it is important to continually modify and improve their existing product portfolio, and also introduce new products. In 2008 Medtronic invested over $1.2 billion, or 9.4% of sales, in research and development. Over the past five years, MDT budgeted an average 9.6% of their revenues to research and development. This is compared to competitors Zimmer and Stryker, who have historical R & D expenses of around 5% of sales. This higher R&D intensity should fuel faster growth in future years.
Cardiac Rhythmic Disease Management. MDT pioneered the modern medical device industry. They developed the first wearable external cardiac pacemaker in 1957 and manufactured the first reliable long-term implantable pacing system in 1960.
MDT has also started a clinical trial to confirm the safety of the Medtronic EnRhythm MRI SureScan pacing system. This is the first pacemaker system developed for safe use in Magnetic Resonance Imaging (MRI) machines.
Spinal and Biologics. Medtronic uses the most modern surgical techniques, including the latest Minimal Access Spinal Technology (MAST).
MDT launched the PRESTIGE Cervical Disc in 2007, which was the first artificial disc commercially
available in the U.S. for use in the neck. They also introduced the Progenix DBM, which is a bone graft substitute and bone void filler used in voids or gaps of the pelvis, ilium, and extremities.
Cardiovascular. In February 2008, MDT announced the FDA approval and the initiation of the U.S. launch of the Endeavor Resolute DES, which is a drug-eluting stent designed to inhibit the re-narrowing or re-clogging of arteries that can occur after percutaneous coronary intervention (PSI).
On November of 2007, MDT received the CE Mark approval for the Sprinter Legend Semicompliant Rapid Exchange Balloon Dilatation Catheter for use in coronary angioplasty procedures. The Sprinter Legend provides the latest innovation in balloon technology.
Neuromodulation. MDT is the pioneer in the field of restorative neuroscience, using site-specific neurostimulation and targeted drug delivery to modulate and restore nervous system function.
In June 2007, MDT initiated the worldwide launch of the Specify 5-6-5 surgical lead for neurostimulation therapy, designed to improve its effect on low back pain.
Diabetes. MDT is committed to providing improved tools and technologies to help people with diabetes live longer, healthier lives.
MDT is conducting the Sensor Augmented Therapy for AIC Reduction (STAR) trials, which will evaluate sensor-augmented insulin pumps versus traditional insulin pumps and multiple daily injection therapy.
Surgical Technologies. MDT is one of the leaders in the field of computer-assisted surgery (CAS) and has installed over 2,500 StealthStation Treatment Guidance Systems in hospitals worldwide. They have developed new and updated hardware and software solutions to assist with varied surgeries. In 2007, MDT acquired the O-arm Imaging System assets of Breakaway Imaging, LLC, a privately held developer of medical imaging systems for surgery.
Medtronic, Inc. Xi Cheng, Jamie Coonce, Amanda Repp
Global Presence
Medtronic operates more than 250 manufacturing facilities, sales offices, research centers, education centers, and administration facilities that serve customers and patients in 120 countries.
In the 1960s, Medtronic’s international sales accounted for one-third of their total revenues. Currently, 38% of their sales come from countries outside the U.S.
Sales are divided into four main regions:
U.S. accounted for $8.3 billion, or 62% of total sales, and had 5.5% growth in 2008.
Europe accounted for $3.3 billion, or 24% of total sales, and had 17% growth in 2008.
Asia accounted for $1.4 billion, or 10% of total sales, and had 20.25% growth in 2008.
Other foreign countries accounted for $454 million, or 4% of total sales, and had 15.5% growth in 2008.
There was a 17.7% increase in international sales from 2007 to 2008.
Macroeconomic Trends that Favor MDT
With the global economic downturn and decreasing consumer spending, the growth in corporate profits has been declining in the U.S. and globally. The healthcare industry’s reputation for being more recession resistant led us to investigate potential investments in this industry.
Medtronic has demonstrated the ability to grow Revenues, Profits, Free Cash Flow, and NOPAT throughout the current challenging environment. The expected growth rates for the overall company and its segments remain positive. Additionally, the CFO has said he feels comfortable predicting a 5-8% growth this year, even with the global economic slowdown.
Growth of the older population in the world’s most prosperous regions shows the growing need for healthcare technology solutions. With Medtronic’s growing presence in countries like the U.S., Europe and Japan, we see evidence that this company is well-positioned for strong growth. As of 2005, U.S. Census Bureau estimates there are 78.2 million baby boomers. Baby boomers make up an estimated 25% of the population, with an additional 12.7% elderly over the age of 65. These two groups alike constitute the largest demographic group in the U.S.
Medtronic, Inc. Xi Cheng, Jamie Coonce, Amanda Repp
Discounted Cash Flow (DCF) Valuation Model
Our valuation analysis uses a discounted cash flow (DCF) approach employing worst-scenario assumptions. It suggests that MDT is undervalued, with an intrinsic value of $61.54 in 2009 vs. the current stock price of $32.64.
DCF Model Forecast Assumptions Revenue Growth: The historical average annual growth rate is 10.4%. Short-term growth rate is projected at -10.0% for 2009 and 10.0% in 2010. Long-term growth rate is tapered down to 5.0% compared to Thomson-Reuter's forecasts of 11%. While the economic downturn and hospital’s shrinking budget for medical devices result in pricing pressures and sales decline in medical device industry, MDT’s CFO confidently announced the company’s prediction of 5% to 8% growth in sales (CNBC 4/30/09). Therefore, our forecast assumptions are extremely conservative. COGS/Sales: conservatively forecasted to 26%, slightly higher than the historical average of 25%. Expenses: SG&A, non-recurring and other expenses are volatile around their average rate from the past five years, and we increase each item above their historical averages, again reflecting our conservative approach to valuing MDT. Dividend Growth: is forecasted at 10.0% (avg-12.6%) to be more conservative in modeling EPS, DPS and intrinsic value per share, and more sustainable over time. Cash/Sales: is tapered down to 15.0% vs. the firm's historical average of 16.9%. Net PPE/Sales: average rate is 17.4%, we model PPE/Sales from 20.0% in 2009 to 17.0% in 2018. Intangibles, Acc. Payable, Acc. Exp: As above, we increase each item slightly higher than the historical 5-year average. Other Curr. Liab.: is tapered down to 4.0% (avg-4.6%) based on the historical decreasing trend. Weighted Average Cost of Capital Assumptions Cost of Equity: Cost of equity at 8.26% is calculated using a risk-free rate of 4%, market risk premium at 6% and beta of 0.71 (greater than the Thomson-Reuters beta of 0.6). WACC: WACC of 7.56% is calculated using respective costs of short-term and long term debt of 4% and 6%. Long-term Horizon Value Growth Rate after the 10-year explicit forecast period is 5%. Valuation Model Outputs We’ve discussed DCF model forecast assumptions and will dig deeper into MDT’s financial strength based on historical and forecast performance. Margins: The competition in the industry of medical appliance and equipment is fierce, and the margins for MDT, SYK, and ZMH are close to each other. MDT, as one of the top three players in this industry, has good margins historically, better than the industry average and S&P 500. MDT has Gross Profit Margin of 74.5%, Operating Profit Margin of 20.5% and Net Profit Margin of 15.7% in 2008. Even though margins are predicted to decrease slightly in our forecast 2009-2018, driven by conservative sales growth and costs assumptions in our model, they remain steady and consistent.
Medtronic, Inc. Xi Cheng, Jamie Coonce, Amanda Repp
Investment Returns: MDT's historical ROE and ROIC are greater than the industry and S&P 500, and are also competitive with industry comparables. Based on the conservative projection, MDT's forecasted ROA will average at 7.6%, ROE will average at 13.1% and ROIC will average at 23.4% in 2009-2018. The strong and sustainable ROA, ROE and ROIC over the past five years show MDT’s efficiency at managing growth and delivering shareholder value. In addition, the ROIC spread over the WACC of 7.56% from 2004-2018 is large and sustainable, indicating MDT is a strong and consistent value creator over time.
EVA & MVA: Economic Value Added is $1,706 million in 2009 and is projected to grow to $2,430 million in 2018 at an average growth rate of 4.2%, even according to the worst-scenario forecast. Market Value Added is $45,606 million, 1.4 times MDT's market cap of $32,490 million in 2008. MVA is forecasted to grow to $89,506 million in 2018 at an average growth rate of 6.9%. The consistent positive EVA and MVA indicate that MDT has added economic value and substantial wealth to shareholders based on the firm’s effective management and internal performance, and that the market has a history of valuing MDT at a premium. NOPAT & FCF: The consistent positive NOPAT and FCF of MDT show that, despite conservative forecast assumptions, the company has the ability to generate growing and sustainable free cash flows at a faster growth rate than their historical trends. NOPAT and FCF are growing at an average growth rate of 5.5% and 2.8%, respectively, in the forecast period. Discounted Cash Flow Valuation: The intrinsic value of $61.54 in 2009 is higher than the current price of $32.64, suggesting MDT is currently undervalued. Even if 2009 revenues and profits conform to worst-scenario projections, MDT appears capable of delivering above-average future returns.
Medtronic, Inc. Xi Cheng, Jamie Coonce, Amanda Repp
Relative Valuation Price/Sales Ratio: MDT's Price/Sales ratio is 2.61 in 2008, consistent with the industry average of 2.60. MDT’s sales growth rate and profit margins have been less volatile than the industry, however. Price/EBITDA: The average ratio over the last five years is 20.06 and has been compressing historically. Price/Free Cash Flows: Even though the ratio is volatile historically, driven by volatility of revenue growth and free cash flows, it’s still greater than the industry average of 13.00 and S&P 500 of 9.30. It demonstrates MDT’s greater growth prospects than the industry average. Enterprise Value/EBITDA equals 14.84 in 2008, lower than its historical average of 21.17. The ratio further compresses in the forecast period. Price/Earnings Ratio: MDT’s declining P/E ratio is affected by similar trends in U.S. stocks. Investors pay less for the same level of earnings; further suggesting MDT may be slightly undervalued. Enterprise Value/EBITDA: justifies the Price/Earnings ratio that it costs shareholders less money to get the same return. Dividend Yield: is 2.33% in 2009 and is expected to range between 0.88% and 1.27% for 2009-2018 (based on higher forecasted intrinsic stock values). MDT has a more stable and faster-growing dividend yield than SYK and ZMH. EPS: is $1.86 in 2008 and is projected to grow to $3.04 in 2018 at the annual growth rate of 4.42%. The relative valuation ratios make it hard to tell which stock is the darling of the market because MDT, SYK and ZMH all have higher relative value than the market due to the fast growth in healthcare sector. It confirms that stocks in this sector are more likely to outperform through the economic recession. Moreover, MDT's higher expected growth and large spread of ROIC over WACC justify higher relative valuation.
Medtronic, Inc. Xi Cheng, Jamie Coonce, Amanda Repp
Other Valuation Measures
Graham and Dodd
Thomson/Reuters computes a relative valuation statistic based on Graham & Dodd techniques. MDT is in the BASELINE in the 8th decile of relative valuation. Investors are paying a lower premium for future earnings than 80% of investors in the S & P 500. This is noteworthy, as few stocks with MDT's growth potential make it to the 8th decile of undervaluation.
Piotroski’s Financial Fitness Scorecard
MDT has a historical five year average score of 8 on a scale of 11. According to our model, MDT has a forecasted average score of 8 also. Piotroski’s Financial Fitness Scorecard is a score based on positive FCF, net income, working capital management and relative growth in assets vs. liabilities.
Earnings Momentum
Also from Thomson/Reuters, MDT has earnings momentum of 60,
meaning that MDT is outperforming 60% of stocks in the S & P 500.
Credit Rating Agencies
Moody’s currently has a long term senior unsecured rating of A1 for MDT. Companies with an A1 rating are considered to be upper-medium grade and are subject to low credit risk.
The S & P 500 currently has a long term senior unsecured rating of AA-. Companies with a rating of AA are considered to have good financial security and are highly safe.
Medtronic, Inc. Xi Cheng, Jamie Coonce, Amanda Repp
Altman Z-Score Test for Bankruptcy
MDT scored a 5.25 (safe zone) on this test. This test was developed by Edward Altman to determine the likelihood of bankruptcy using five financial ratios. Companies in the safe zone are considered to be healthy and unlikely to enter bankruptcy.
Data Source: Thomson/Reuters Altman's Z-Score Test for Bankruptcy
Value Score Weight
(Current Assets-Current Liabilities)/Total Assets 0.170601 0.204721 1.2000
Retained Earnings/Total Assets 0.527525 0.738535 1.4000
Earnings Before Interest & Tax/Total Assets 0.125056 0.412686 3.3000
Market Value Equity/Total Liabilities 5.360000 3.215663 0.6000
Sales/Total Assets 0.608839 0.60823 0.9990
Altman Z-Score 5.179835
Safe Zone: Z>2.9 Grey Zone: 1.23<Z<2.9 Distress Zone: Z<1.23
Other Institutional Recommendations
The mean analyst recommendation for MDT is 2.2 for the last two weeks indicating a “buy” signal from analysts. MDT has a rating of “outperform” from numerous analysts including Wachovia, Piper Jaffray Companies, and Bernstein.
Institutional Ownership
Institutional investors own 79% of MDT’s shares.
Insider Trading
Although executives and insiders tend to sell their holdings over time to diversify their wealth, we were encouraged by the fact that Medtronic’s insider selling ceased in late 2006. Insiders have actually been increasing their holdings of MDT in the past 2 ½ years.
Medtronic, Inc. Xi Cheng, Jamie Coonce, Amanda Repp
Days to Cover Ratio
The days to cover ratio is computed as the average daily trading volume divided by the total number of shares currently sold short. This tells you how long it would take for short sellers to cover their short positions. MDT’s Days to Cover has averaged less than 3 since 2004, indicating that the short sellers have never had this stock in their sights throughout the entire economic downturn.
Recommendation
We give MDT a “buy” recommendation based on:
The double digit dividend growth rates four out of the last five years.
High expected future growth based on compelling macroeconomic and industry factors.
The sustainable ROIC >WACC.
The DCF model 2009 price per share intrinsic value of $61.54 and undervalued market price of $32.16.
MDT Valuation & Analysis Model Page 1 of 8
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394041424344454647484950515253545556
A B C D E F G H I J K L M N
Enter Firm Ticker MDT
values in millions
Historical Income Statements Forecasting Percentages
Enter first financial statement year in cell B6 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Average Manual
Total revenue 9,087 10,055 11,292 12,299 13,515 Revenue Growth 10.6% 12.3% 8.9% 9.9% 10.4% 9.0%
Cost of goods sold 2,253 2,446 2,815 3,160 3,442 COGS % of Sales 24.8% 24.3% 24.9% 25.7% 25.5% 25.0% 26.0%
Gross profit 6,834 7,608 8,477 9,139 10,073
SG&A expense 2,801 3,214 3,659 4,153 4,707 SG&A % of Sales 30.8% 32.0% 32.4% 33.8% 34.8% 32.8% 34.8%
Research & Development 852 951 1,113 1,239 1,275 R&D % of Sales 9.4% 9.5% 9.9% 10.1% 9.4% 9.6%
Depreciation/Amortization 0 0 0 0 0 D&A % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Interest expense (income), operating 0 0 0 0 0 Inc. Exp. Oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Non-recurring expenses 36 654 464 174 879 Exp. Non-rec 0.4% 6.5% 4.1% 1.4% 6.5% 3.8% 5.0%
Other operating expenses 351 291 167 212 436 Other exp. 3.9% 2.9% 1.5% 1.7% 3.2% 2.6% 3.0%
Operating Income 2,794 2,498 3,074 3,361 2,776
Interest income (expense), non-operating 0 0 0 0 0 Int. inc. non-oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Gain (loss) on sale of assets 0 0 0 0 0 Gain (loss) asset sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other income, net 0 0 0 0 0 Other income, net 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Income before tax 2,794 2,498 3,074 3,361 2,776
Income tax 838 740 615 713 654 Tax rate 30.0% 29.6% 20.0% 21.2% 23.6% 24.9%
Income after tax 1,956 1,759 2,459 2,648 2,122
Minority interest 0 0 0 0 0 Minority interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Equity in affiliates 0 0 0 0 0 Equity in affiliates 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
U.S. GAAP adjustment 0 0 0 0 0 U.S. GAAP adjust. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Net income before extraordinary items 1,956 1,759 2,459 2,648 2,122
Extraordinary items, total 0 0 0 0 0 Extrordinary items orecast, set to zero in the forecast
Net income 1,956 1,759 2,459 2,648 2,122
Total adjustments to net income 0 0 0 0 0 Adjustments to NI orecast, set to zero in the forecast
Basic weighted average shares 1,214 1,209 1,205 1,150 1,131 Share growth -0.4% -0.4% -4.5% -1.7% -1.8%
Basic EPS excluding extraordinary items 1.61 1.45 2.04 2.30 1.88
Basic EPS including extraordinary items 1.61 1.45 2.04 2.30 1.88
Diluted weighted average shares 1,226 1,221 1,217 1,162 1,142 Diluted share growth -0.4% -0.3% -4.6% -1.7% -1.8%
Diluted EPS excluding extraordinary items 1.60 1.44 2.02 2.28 1.86
Diluted EPS including extraordinary items 1.60 1.44 2.02 2.28 1.86
Dividends per share -- common stock 0.29 0.33 0.39 0.44 0.50
Gross dividends -- common stock 352 405 465 504 565 Dividend growth 15.2% 14.8% 8.4% 12.1% 12.6% 10.0%
Retained earnings 1,605 1,354 1,995 2,144 1,557
Data Source: Thomson/Reuters
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
MDT Valuation & Analysis Model Page 2 of 8
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O P Q R S T U V W X Y Z
Year-by-year revenue growth -10.00% 10.00% 8.00% 8.00% 7.50% 7.00% 6.00% 6.00% 5.00% 5.00%
Forecasted Income Statements -- 10 Years
year 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Total revenue 12,164 13,380 14,450 15,606 16,777 17,951 19,028 20,170 21,178 22,237
Cost of goods sold 3,163 3,479 3,757 4,058 4,362 4,667 4,947 5,244 5,506 5,782
Gross profit 9,001 9,901 10,693 11,549 12,415 13,284 14,081 14,926 15,672 16,456
SG&A expense 4,233 4,656 5,029 5,431 5,838 6,247 6,622 7,019 7,370 7,739
Research & Development 1,173 1,290 1,393 1,504 1,617 1,730 1,834 1,944 2,042 2,144
Depreciation/Amortization 0 0 0 0 0 0 0 0 0 0
Interest expense (income), operating 0 0 0 0 0 0 0 0 0 0
Non-recurring expenses 608 669 723 780 839 898 951 1,008 1,059 1,112
Other operating expenses 365 401 434 468 503 539 571 605 635 667
Operating Income 2,622 2,885 3,116 3,365 3,617 3,870 4,103 4,349 4,566 4,794
Interest income (expense), non-operating (417) (424) (428) (432) (439) (445) (446) (454) (460) (466)
Gain (loss) on sale of assets 0 0 0 0 0 0 0 0 0 0
Other income, net 0 0 0 0 0 0 0 0 0 0
Income before tax 2,205 2,461 2,688 2,932 3,178 3,425 3,656 3,894 4,107 4,329
Income tax 548 612 668 729 790 852 909 969 1,021 1,077
Income after tax 1,657 1,849 2,019 2,203 2,388 2,573 2,747 2,926 3,085 3,252
Minority interest 0 0 0 0 0 0 0 0 0 0
Equity in affiliates 0 0 0 0 0 0 0 0 0 0
U.S. GAAP adjustment 0 0 0 0 0 0 0 0 0 0
Net income before extraordinary items 1,657 1,849 2,019 2,203 2,388 2,573 2,747 2,926 3,085 3,252
Extraordinary items, total 0 0 0 0 0 0 0 0 0 0
Net income 1,657 1,849 2,019 2,203 2,388 2,573 2,747 2,926 3,085 3,252
Total adjustments to net income 0 0 0 0 0 0 0 0 0 0
Basic weighted average shares 1,111 1,091 1,072 1,053 1,035 1,017 999 981 964 947
Basic EPS excluding extraordinary items 1.49 1.69 1.88 2.09 2.31 2.53 2.75 2.98 3.20 3.43
Basic EPS including extraordinary items 1.49 1.69 1.88 2.09 2.31 2.53 2.75 2.98 3.20 3.43
Diluted weighted average shares 1,122 1,102 1,083 1,064 1,045 1,027 1,009 991 974 957
Diluted EPS excluding extraordinary items 1.48 1.68 1.86 2.07 2.28 2.51 2.72 2.95 3.17 3.40
Diluted EPS including extraordinary items 1.48 1.68 1.86 2.07 2.28 2.51 2.72 2.95 3.17 3.40
Dividends per share -- common stock 0.56 0.63 0.70 0.79 0.88 0.98 1.10 1.23 1.38 1.55
Gross dividends -- common stock 622 684 752 827 910 1,001 1,101 1,211 1,332 1,465
Retained earnings 1,035 1,165 1,267 1,376 1,478 1,572 1,646 1,715 1,753 1,787
Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period.Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period.Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period.Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period.
MDT Valuation & Analysis Model Page 3 of 8
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AA AB AC AD AE AF AG AH AI AJ AK AL AM AN
Enter Firm Ticker MDT
values in millions
Historical Balance Sheets Forecasting Percentages
year 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Average Manual
Assets
Cash & equivalents 1,594 2,232 2,994 1,256 1,060 Cash % of Sales 17.5% 22.2% 26.5% 10.2% 7.8% 16.9% 15.0%
Short term investments 334 1,159 3,107 1,822 553 ST Invest. % of Sales 3.7% 11.5% 27.5% 14.8% 4.1% 12.3%
Receivables, total 1,994 2,293 2,429 2,737 3,360 Receivables % Sales 21.9% 22.8% 21.5% 22.3% 24.9% 22.7%
Inventory, total 878 981 1,177 1,215 1,280 Inventory % of Sales 9.7% 9.8% 10.4% 9.9% 9.5% 9.8%
Prepaid expenses 316 370 473 483 469 Pre. Exp. % of Sales 3.5% 3.7% 4.2% 3.9% 3.5% 3.7%
Other current assets, total 197 386 197 405 600 Other CA % of Sales 2.2% 3.8% 1.7% 3.3% 4.4% 3.1%
Total Current Assets 5,313 7,422 10,377 7,918 7,322
Property, plant and equipment (net) 1,708 1,859 1,881 2,062 2,221 Net PPE % of Sales 18.8% 18.5% 16.7% 16.8% 16.4% 17.4% 17.0%
Goodwill 4,237 4,281 4,346 4,327 7,519 Goodwill % of Sales 46.6% 42.6% 38.5% 35.2% 55.6% 43.7%
Intangibles 999 1,018 1,592 1,433 2,193 Intangibles % of Sales 11.0% 10.1% 14.1% 11.7% 16.2% 12.6% 14.0%
Long term investments 1,456 1,566 957 3,203 2,322 LT Invest. % of Sales 16.0% 15.6% 8.5% 26.0% 17.2% 16.7%
Notes receivable -- long term 0 0 0 0 0 Notes Rec. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other long term assets, total 397 472 513 569 621 Other LT ass. % Sales 4.4% 4.7% 4.5% 4.6% 4.6% 4.6%
Other assets, total 0 0 0 0 0 Other assets % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total assets 14,111 16,617 19,665 19,512 22,198
Liabilities and Shareholders' Equity
Accounts payable 346 372 319 282 383 Acc. Payable % Sales 3.8% 3.7% 2.8% 2.3% 2.8% 3.1% 4.5%
Payable/accrued 0 0 0 0 0 Pay/accured % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Accrued expenses 899 1,606 1,189 1,422 1,998 Acc. Exp. % of Sales 9.9% 16.0% 10.5% 11.6% 14.8% 12.5% 15.0%
Notes payable/short term debt 2,358 479 2,437 504 1,143 Notes payable % Sales 26.0% 4.8% 21.6% 4.1% 8.5% 13.0%
Current portion of LT debt/Capital leases 0 0 0 5 11 Curr. debt % of Sales 0.0% 0.0% 0.0% 0.0% 0.1% 0.0%
Other current liabilities 638 923 461 350 0 Other curr liab % Sales 7.0% 9.2% 4.1% 2.8% 0.0% 4.6% 4.0%
Total Current Liabilities 4,241 3,380 4,406 2,563 3,535
Long term debt, total 1 1,973 5,486 5,578 5,802 LT debt % of Sales djusted for AFN in the pro formas
Deferred income tax 408 478 22 0 0 Def. inc. tax % Sales 4.5% 4.8% 0.2% 0.0% 0.0% 1.9%
Minority interest 0 0 0 0 0 Min. Int. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other liabilities, total 384 337 368 394 1,325 Other liab. % of Sales 4.2% 3.3% 3.3% 3.2% 9.8% 4.8%
Total Liabilities 5,034 6,168 10,282 8,535 10,662
Preferred stock (redeemable) 0 0 0 0 0
Preferred stock (unredeemable) 0 0 0 0 0
Common stock 121 121 116 114 112
Additonal paid-in capital 0 0 0 0 0Retained earnings (accumluated deficit) 8,891 10,179 9,112 10,925 11,710Treasury stock -- common 0 0 0 0 0 Set to last historical year's level throughout the forecasts.ESOP Debt Guarantee (7) 0 0 0 0 Set to last historical year's level throughout the forecasts.Other equity, total 72 150 155 (62) (286)
Total Shareholders' Equity 9,077 10,450 9,383 10,977 11,536Total Liabilities and Shareholders' Equity 14,111 16,617 19,665 19,512 22,198Diluted weighted average shares 1,226 1,221 1,217 1,162 1,142 Diluted share growth -0.4% -0.3% -4.6% -1.7% -1.8%Total preferred shares outstanding 0 0 0 0 0 Preferred share growth
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
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AO AP AQ AR AS AT AU AV AW AX AY AZ
Year-by-year PPE/Sales 20.00% 19.00% 19.00% 18.50% 18.00% 18.00% 17.50% 17.00% 17.00% 17.00%
Forecasted Balance Sheets -- 10 Years
year 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Assets
Cash & equivalents 5,400 5,400 5,500 5,700 6,030 6,370 6,900 7,550 8,250 8,940
Short term investments 1,499 1,649 1,781 1,924 2,068 2,213 2,345 2,486 2,610 2,741
Receivables, total 2,758 3,034 3,277 3,539 3,804 4,070 4,315 4,574 4,802 5,042
Inventory, total 1,197 1,316 1,422 1,535 1,651 1,766 1,872 1,984 2,084 2,188
Prepaid expenses 456 501 542 585 629 673 713 756 794 833
Other current assets, total 377 414 447 483 519 556 589 625 656 689
Total Current Assets 11,686 12,315 12,968 13,766 14,701 15,648 16,734 17,974 19,196 20,433
Property, plant and equipment (net) 2433 2542 2746 2887 3020 3231 3330 3429 3600 3780
Goodwill 5,316 5,847 6,315 6,820 7,332 7,845 8,315 8,814 9,255 9,718
Intangibles 1,703 1,873 2,023 2,185 2,349 2,513 2,664 2,824 2,965 3,113
Long term investments 2,026 2,229 2,407 2,600 2,795 2,991 3,170 3,360 3,528 3,705
Notes receivable -- long term 0 0 0 0 0 0 0 0 0 0
Other long term assets, total 555 611 660 712 766 819 869 921 967 1,015
Other assets, total 0 0 0 0 0 0 0 0 0 0
Total assets 23,719 25,417 27,119 28,970 30,962 33,047 35,082 37,322 39,511 41,764
Liabilities and Shareholders' Equity
Accounts payable 547 602 650 702 755 808 856 908 953 1,001
Payable/accrued 0 0 0 0 0 0 0 0 0 0
Accrued expenses 1,825 2,007 2,168 2,341 2,517 2,693 2,854 3,025 3,177 3,336
Notes payable/short term debt 1,578 1,735 1,874 2,024 2,176 2,328 2,468 2,616 2,747 2,884
Current portion of LT debt/Capital leases 3 3 4 4 4 4 5 5 5 5
Other current liabilities 487 535 578 624 671 718 761 807 847 889
Total Current Liabilities 4,439 4,883 5,273 5,695 6,122 6,551 6,944 7,361 7,729 8,115 Valuation
Long term debt, total 5,899 5,907 5,879 5,856 5,865 5,871 5,796 5,829 5,829 5,838
Deferred income tax 230 253 273 295 317 339 359 381 400 420
Minority interest 0 0 0 0 0 0 0 0 0 0
Other liabilities, total 580 638 689 744 800 856 907 962 1,010 1,060
Total Liabilities 11,148 11,681 12,115 12,590 13,104 13,617 14,006 14,532 14,968 15,434
Preferred stock (redeemable) 0 0 0 0 0 0 0 0 0 0
Preferred stock (unredeemable) 0 0 0 0 0 0 0 0 0 0
Common stock 112 112 112 112 112 112 112 112 112 112
Additonal paid-in capital 0 0 0 0 0 0 0 0 0 0Retained earnings (accumluated deficit) 12,745 13,911 15,178 16,554 18,032 19,604 21,250 22,964 24,717 26,504Treasury stock -- common 0 0 0 0 0 0 0 0 0 0ESOP Debt Guarantee 0 0 0 0 0 0 0 0 0 0Other equity, total (286) (286) (286) (286) (286) (286) (286) (286) (286) (286)
Total Shareholders' Equity 12,571 13,737 15,004 16,380 17,858 19,430 21,076 22,790 24,543 26,330Total Liabilities and Shareholders' Equity 23,719 25,417 27,119 28,970 30,962 33,047 35,082 37,322 39,511 41,764Total common shares (diluted) 1,122 1,102 1,083 1,064 1,045 1,027 1,009 991 974 957Total preferred shares outstanding 0 0 0 0 0 0 0 0 0 0AFN (interactive with 3 items below) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Adjustment to LT Debt (use Goal Seek) 97.2 8.0 (27.8) (23.3) 8.5 6.2 (75.1) 32.8 0.5 9.4Issue Common Stock to Fund AFNSet Balance Sheet Cash Lower to Fund AFN 5,400.0 5,400 5,500 5,700 6,030 6,370 6,900 7,550 8,250 8,940
Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 entries to Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 entries to Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 entries to Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 entries to
MDT Valuation & Analysis Model Page 5 of 8
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BA BB BC BD BE BF BG BH BI BJ BK BL BM BN BO BPEnter Firm Ticker MDT
values in millions
Historical Ratios and Valuation Model Forecasted Ratios and Valuation Model -- 10 Years
2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Liquidity
Current 1.25 2.20 2.36 3.09 2.07 2.63 2.52 2.46 2.42 2.40 2.39 2.41 2.44 2.48 2.52
Quick 1.05 1.91 2.09 2.62 1.71 2.36 2.25 2.19 2.15 2.13 2.12 2.14 2.17 2.21 2.25
Net Working Capital to Total Assets 0.08 0.24 0.30 0.27 0.17 0.31 0.29 0.28 0.28 0.28 0.28 0.28 0.28 0.29 0.29
Asset Management
Days Sales Outstanding 80.10 83.23 78.51 81.23 90.74 82.76 82.76 82.76 82.76 82.76 82.76 82.76 82.76 82.76 82.76
Inventory Turnover 10.35 10.25 9.59 10.12 10.56 10.16 10.16 10.16 10.16 10.16 10.16 10.16 10.16 10.16 10.16
Fixed Assets Turnover 5.32 5.41 6.00 5.96 6.09 5.00 5.26 5.26 5.41 5.56 5.56 5.71 5.88 5.88 5.88
Total Assets Turnover 0.64 0.61 0.57 0.63 0.61 0.51 0.53 0.53 0.54 0.54 0.54 0.54 0.54 0.54 0.53
Debt Management
Long-Term Debt to Equity 0.0% 18.9% 58.5% 50.8% 50.3% 46.9% 43.0% 39.2% 35.8% 32.8% 30.2% 27.5% 25.6% 23.8% 22.2%
Total Debt to Total Assets 16.7% 14.8% 40.3% 31.2% 31.3% 31.5% 30.1% 28.6% 27.2% 26.0% 24.8% 23.6% 22.6% 21.7% 20.9%
Times Interest Earned N/A N/A N/A N/A N/A 6.3 6.8 7.3 7.8 8.2 8.7 9.2 9.6 9.9 10.3
ProfitabilityGross Profit Margin 75.2% 75.7% 75.1% 74.3% 74.5% 74.0% 74.0% 74.0% 74.0% 74.0% 74.0% 74.0% 74.0% 74.0% 74.0%
Operating Profit Margin 30.7% 24.8% 27.2% 27.3% 20.5% 21.6% 21.6% 21.6% 21.6% 21.6% 21.6% 21.6% 21.6% 21.6% 21.6%
Net After-Tax Profit Margin 21.5% 17.5% 21.8% 21.5% 15.7% 13.6% 13.8% 14.0% 14.1% 14.2% 14.3% 14.4% 14.5% 14.6% 14.6%
Total Assets Turnover 0.64 0.61 0.57 0.63 0.61 0.51 0.53 0.53 0.54 0.54 0.54 0.54 0.54 0.54 0.53
Return on Assets 13.9% 10.6% 12.5% 13.6% 9.6% 7.0% 7.3% 7.4% 7.6% 7.7% 7.8% 7.8% 7.8% 7.8% 7.8%
Equity Multiplier 1.55 1.59 2.10 1.78 1.92 1.89 1.85 1.81 1.77 1.73 1.70 1.66 1.64 1.61 1.59
Return on Equity 21.6% 16.8% 26.2% 24.1% 18.4% 13.2% 13.5% 13.5% 13.5% 13.4% 13.2% 13.0% 12.8% 12.6% 12.4%
EPS (using diluted shares, excluding extraordinary items) 1.60 1.44 2.02 2.28 1.86 1.48 1.68 1.86 2.07 2.28 2.51 2.72 2.95 3.17 3.40
DPS (dividends per share) 0.29 0.33 0.38 0.43 0.49 0.55 0.62 0.69 0.78 0.87 0.97 1.09 1.22 1.37 1.53
n Metrics Trend Analysis (NOPAT, EVA, MVA, FCF and Capital in millions) Forecasted Valuation Metrics -- 10 Years
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
NOPAT (net operating profit after tax) 1,956 1,759 2,459 2,648 2,122 1,970 2,167 2,341 2,528 2,718 2,908 3,082 3,267 3,431 3,602
ROIC (return on invested capital) 39.7% 32.6% 35.3% 47.6% 38.3% 20.9% 22.4% 23.1% 23.8% 24.2% 24.4% 24.3% 24.0% 23.5% 23.1%
EVA (economic value added) 1,584 1,352 1,932 2,227 1,703 1,259 1,436 1,576 1,726 1,869 2,006 2,122 2,239 2,327 2,422
FCF (free cash flow) N/A 1,301 873 4,055 2,148 (1,905) 1,900 1,898 2,036 2,103 2,204 2,313 2,370 2,428 2,594
Weighted Average Cost of Capital 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6%
Net Operating Working Capital (NOWC) 3,221 3,528 5,092 3,504 3,319 6,983 7,141 7,380 7,731 8,213 8,706 9,376 10,175 11,006 11,834
Operating Long Term Assets 1,708 1,859 1,881 2,062 2,221 2,433 2,542 2,746 2,887 3,020 3,231 3,330 3,429 3,600 3,780
Total Operating Capital 4,929 5,388 6,973 5,566 5,540 9,416 9,683 10,126 10,618 11,233 11,937 12,706 13,604 14,606 15,614
Valuation (in millions) -- through year 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Long-term Horizon Value Growth Rate (user-supplied) 5.00%PV of Forecasted FCF, discounted at 7.56% $62,474 $69,100 $72,421 $75,995 $79,701 $83,621 $87,735 $92,051 $96,636 $101,510 $108,997Value of Non-Operating Assets $1,613 $6,899 $7,049 $7,281 $7,624 $8,098 $8,583 $9,245 $10,036 $10,860 $11,681Total Intrinsic Value of the Firm $64,087 $75,999 $79,470 $83,276 $87,325 $91,718 $96,318 $101,296 $106,672 $112,370 $120,678Intrinsic Market Value of the Equity $57,142 $69,054 $72,525 $76,331 $80,380 $84,773 $89,373 $94,351 $99,727 $105,425 $113,733Per Share Intrinsic Value of the Firm $50.03 $61.54 $65.79 $70.48 $75.54 $81.10 $87.02 $93.51 $100.60 $108.25 $118.87MVA (market value added) $45,606 $56,483 $58,789 $61,327 $64,000 $66,916 $69,943 $73,275 $76,937 $80,882 $87,403
Weighted Average Cost of Capital Calculations Capital Asset Pricing ModelItem Value Percent Cost Weighted Cost Risk Free Rate 4.00%
ST Debt (from most recent balance sheet) 1,143 2.90% 4.00% 0.09% Beta 0.71 Source: ValueLineLT Debt (from most recent balance sheet) 5,802 14.71% 6.00% 0.66% Market Risk Prem. 6.00%MV Equity (look up stock's mkt. cap and enter in cell BB53) 32,490 82.39% 8.26% 6.81% Cost of Equity 8.26%Weighted Average Cost of Capital 7.56%
Source: Yahoo (3/8/09)http://finance.yahoo.com/bonds/composite_bond_rates
MDT Valuation & Analysis Model Page 6 of 8
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BQ BR BS BT BU BV BW BX BY BZ CA CB CC CD CE CF CG CH
Inputs 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Per share value (hist. & DCF est.) $49.67 $57.57 $53.51 $50.27 $31.24 $61.54 $65.79 $70.48 $75.54 $81.10 $87.02 $93.51 $100.60 $108.25 $118.87
Market capitalization $60,284 $69,602 $64,453 $57,795 $35,323 $68,364 $71,800 $75,568 $79,575 $83,924 $88,477 $93,404 $98,726 $104,366 $112,589
EBITDA $2,794 $2,498 $3,074 $3,361 $2,776 $2,622 $2,885 $3,116 $3,365 $3,617 $3,870 $4,103 $4,349 $4,566 $4,794
Enterprise Value $61,050 $69,822 $69,382 $62,621 $41,208 $70,441 $74,043 $77,821 $81,755 $85,935 $90,306 $94,768 $99,620 $104,691 $112,372
Multiples
Price/Sales 6.63 6.92 5.71 4.70 2.61 5.62 5.37 5.23 5.10 5.00 4.93 4.91 4.89 4.93 5.06
Price/EBITDA 21.58 27.86 20.97 17.20 12.72 26.07 24.89 24.26 23.65 23.20 22.86 22.77 22.70 22.86 23.48
Price/Free Cash Flow N/A 53.73 74.07 14.93 16.72 -35.88 37.80 39.81 39.09 39.92 40.15 40.38 41.66 42.99 43.40
Enterprise Value/EBITDA 21.85 27.95 22.57 18.63 14.84 26.86 25.67 24.98 24.30 23.76 23.33 23.10 22.91 22.93 23.44
Price/Earnings 31.13 39.96 26.49 22.06 16.81 41.68 39.23 37.80 36.48 35.50 34.73 34.35 34.09 34.17 34.97
Dividend Yield 0.58% 0.58% 0.71% 0.86% 1.58% 0.90% 0.94% 0.99% 1.03% 1.07% 1.12% 1.17% 1.21% 1.26% 1.29%
Historical Override
Valuation Estimates Based On: Average w/Manual 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Price/Sales 5.32 4.70 $50.95 $57.05 $62.71 $68.94 $75.43 $82.15 $88.63 $95.63 $102.21 $109.23
Price/EBITDA 20.06 $47.37 $53.04 $58.30 $64.09 $70.13 $76.38 $82.41 $88.92 $95.03 $101.56
Price/Free Cash Flow 39.86 20.00 -$34.30 $34.81 $35.40 $38.65 $40.63 $43.35 $46.32 $48.29 $50.36 $54.78
Enterprise Value/EBITDA 21.17 $49.98 $55.96 $61.51 $67.62 $73.99 $80.58 $86.95 $93.81 $100.26 $107.15
Price/Earnings 27.29 18.00 $26.85 $30.49 $33.90 $37.65 $41.53 $45.55 $49.50 $53.67 $57.60 $61.80
Low Price $26.85 $30.49 $33.90 $37.65 $40.63 $43.35 $46.32 $48.29 $50.36 $54.78
High Price $50.95 $57.05 $62.71 $68.94 $75.43 $82.15 $88.63 $95.63 $102.21 $109.23
DCF Price $61.54 $65.79 $70.48 $75.54 $81.10 $87.02 $93.51 $100.60 $108.25 $118.87
Historical Ratios and Valuation Forecasted Ratios and Valuation
Forecasted Stock Prices Based on Historical Multiples -- 10 Years
In this section we are going to examine historical and forecasted ratios (or "multiples") typically used to value stocks ‐‐ P/CF, Enterprise Value/EBITDA, etc. We first want to compare the historical trends in these ratios to the trends in their forecasted values. If our forecasted multiples are systematically increasing or decreasing our forecasts may be too optimistic or pessimistic, and our forecast assumptions may have to be adjusted. Second, we want to compare our discounted cash flow valuation estimates with those derived from the various multiples. Once again, if there is a large discrepancy between our DCF valuation estimate of the company's stock and the range of values obtained from the various multiples, we may want to adjust our forecast assumptions. 1. You will need to look up the company's year‐end stock prices and enter them in the first 5 (historical) years of the "per share value" category.2. Use the estimated DCF price per share in the forecasted period (link to your forecasted prices in cells BG47‐BP47.3. Market capitalization will be calculated as basic weighted shares x historical year‐end prices and then forecasted basic weighted shares x DCF forecasted prices.4. As with previous calculations, historical multiples use actual historical values and forecasted multiples use forecasted values.
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Price/Sales and Enterprise Value/EBITDA vs. Price
Price/Sales Enterprise Value/EBITDA DCF Price
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CI CJ CK CL CM CN CO CP CQ CR CS CT CU CV CW CX CY CZ DA DB
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30
40
50
Dividend Yield
Price/Earnings Ratio
Price/Earnings Ratio and Dividend Yield
Price/Earnings Ratio Dividend Yield
10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%
Gross M
argin
Gross, Operating and Net Profit Margins
Gross Margin Operating Margin Net Margin
0%5%10%15%20%25%30%35%40%45%50%
ROA, R
OE an
d ROIC
Return on Assets, Equity and Invested Capital
Return on Assets Return on Equity Return on Invested Capital
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
NOPAT an
d Free Cash Flow
NOPAT and Free Cash Flow (millions)
NOPAT Free Cash Flow
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
($1,000)
($500)
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Market Value Added
Economic Value Added
Economic Value Added & Market Value Added (millions)
Economic Value Added Market Value Added
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
EPS an
d DPS
Earnings and Dividends Per Share
Earnings Per Share Dividends Per Share
MDT Valuation & Analysis Model Page 8 of 8
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394041424344454647484950515253545556
DC DD DE DF DG DH DI DJ DK DL DM DN DO DP DQ DR DS DT DU DV
0
1
2
3
4
5
6
Days to Cover Ratio
Days to Cover Ratio (Short Interest ÷ Volume)
Days to Cover
3,000
6,000
9,000
12,000
15,000
18,000
21,000
24,000
27,000
Short Interst (thousands)
Short Interest (thousands of shares)
Short Interest (thousands of shares)
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Avg. D
aily Volume
Average Daily Trading Volume (thousands)
Average Daily Volume (thousands of shares)
($100,000)
($80,000)
($60,000)
($40,000)
($20,000)
$0
$20,000
Net Insider Tran
sactions
Net Insider Purchases (Sales) , $, in thousands
Net Insider Transactions, $, in thousands
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Historical P/E Ratio
Historical Trends: Price/Earnings Ratio
Stryker Medtronic
0.9
1.9
2.9
3.9
4.9
5.9
6.9
7.9
Historical P/S Ratio
Historical Trends: Price/Sales Ratio
Stryker Medtronic
Fin. and Bankruptcy Scorecards Page 1 of 1
Enter Firm Ticker MDT
Value Score RationaleNet Income 2,122 1 Score 1 point for positive net income.Free Cash Flow 2,148 1 Score 1 point for positive free cash flow.ROA (% change NI ÷ % change TA) (1.44) 0 Score 1 point if % increase in NI > % increase in total assets.Earnings Quality (EBIT ÷ NI) 1.31 1 Score 1 point if EBIT > NI.Total Assets to Total Liabilities 0.55 0 Score 1 point if % increase in TA > % increase in TL.Working Capital (Current Ratio) 2.07 0 Award 1 point if Current Ratio at least as large as last year.% Change Shares Outstanding (Diluted) -1.7% 1 Award 1 point if total diluted shares increased by less than 2%.Gross Margin 74.5% 1 Award 1 point if gross margin increased over last year.Asset Turnover (% change sales ÷ % change assets) 0.72 0 Award 1 point if sales increased faster than total assets.Total Liabilities to EBITDA 2.61 1 Award 1 point if ratio less than 5.0.Total Liabilities to Operating Cash Flow (EBIT) 3.84 1 Award 1 point if ratio less than 4.0.
Total Score (11 = maximum) 7
Data Source: Thomson/Reuters
Value Score Weight(Current Assets-Current Liabilites)/Total Assets 0.170601 0.204721 1.2000Retained Earnings/Total Assets 0.527525 0.738535 1.4000Earnings Before Interest & Tax/Total Assets 0.125056 0.412686 3.3000Market Value Equity/Total Liabilities 5.36 3.215663 0.6000Sales/Total Assets 0.608839 0.60823 0.9990
Altman Z-Score 5.179835
Safe Zone: Z>2.9Grey Zone: 1.23<Z<2.9Distress Zone: Z<1.23
Piotroski's Financial Fitness Evaluator
Altman's Z-Score Test for Bankruptcy
MDT ROIC Analysis Page 1 of 2
MDT Gross Marginpercent 2003
75.2%74.5%2007
Operating Margin SG&A/Revenues2003 2003
Pre-tax ROIC 30.7% 30.8%2003 20.5% 34.8%
56.7% 2007 2007ROIC 50.1%2003 2007 Depreciation/Revenues
39.7% 200338.3% 0.0%2007 Cash tax rate 0.0%
2003 2007
Historical ROIC: Decomposition and Drivers
Enter Firm Ticker
2003 200730.0%23.6% Average Capital Turns Oper. Working Capital/Revenues2007 2003 2003
1.8 35.4%2.4 24.6%
2007 2007
Fixed Assets/Revenues2003
18.8%16.4%2007
Data Source: Thomson/Reuters
MDT ROIC Analysis Page 2 of 2
MDT Gross Marginpercent 2008
74.0%74.0%2017
Operating Margin SG&A/Revenues2008 2008
Pre-tax ROIC 21.6% 34.8%2008 21.6% 34.8%
27.9% 2017 2017ROIC 30.7%2008 2017 Depreciation/Revenues
20.9% 200823.1% 0.0%2017 Cash tax rate 0.0%
2008 2017
Forecasted ROIC: Decomposition and Drivers
Enter Firm Ticker
2008 201724.9%24.9% Average Capital Turns Oper. Working Capital/Revenues2017 2008 2008
1.3 57.4%1.4 53.2%
2017 2017
Fixed Assets/Revenues2008
20.0%17.0%2017
Data Source: Thomson/Reuters