Thesis intact. Key takeaways from the quarter:
Medtronic reported strong 4Q FY18 sales and earnings results this morning with +6.5% organic sales growth and +6.5% EPS growth. Top line growth was robust across all segments, with Diabetes impressive at +21% (thanks to US patient demand for its insulin pump). Operating margin expanded (+80bps) in the quarter, thanks to cost savings initiatives.
The initial FY19 organic sales growth guidance of +4-4.5% is achievable and leaves room for upside, while operating margin should expand by 50bps (better than FY18 +20bps) and EPS growth in the +8-9% range. Management thinks that its emerging market business will grow in the low double digits going forward, following a +15.5% growth in 4Q. Free cash flow conversion will improve going forward, as litigation and tax payments diminish. The tax reform will push for more overseas assets liquidation to continue.
In an interesting move, MDT hired Michael Weinstein earlier this month, a well-regarded sell-side analyst (JP Morgan), to lead its strategy. He’s bringing a deep knowledge of the medtech space, and we can expect some M&A/divestiture/capital allocation moves in the coming year. The next catalyst will be when the company introduces its long-term outlook during its investor day on June 5th.
Valuation unchanged, we are maintaining our $93 price target, reflecting the recent strength in the business.
MDT Thesis:
· Stands to benefit from secular trends (1) increased utilization from Obamacare (2) developed populations age
· Strong balance sheet and cash flows. Increased access to non-cash should allow MDT to meaningfully increase their dividend
· 6% normalized Real Cash yield provides solid total return profile over next 2-3 years
· Ownership interest aligned. Management incentivized to maximize shareholder returns – 14% 10yr average ROIC
[tag MDT]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
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