Key Takeaways:
Current Price: $91 Price Target: $100
Position Size: 2.88% TTM Performance: +4%
Medtronic released their 4Q FY19 results this morning, with organic revenue growth of 3.6%, a +140bps adjusted operating margin expansion and +8.5% adjusted EPS growth. Spine sales combined with its recently acquired Mazor spinal robot grew the most in 2 years (+5.6%), a favorable sign for its upcoming general surgery robot that will be revealed in the fall. Sales were negatively impacted in the quarter by an unexpected sterilization plant closure (should be back up and running in 1Q) and lower sales in heart devices. But overall FY19 results were solid, with organic growth of 5.5%, 50bps margin improvement and a free cash flow conversion of 83%.
The management team issued its initial FY20 guidance that shows continued low-to-mid-single digits revenue and EPS growth, a relief as investors were expecting a weaker guide. Major product launches in the next 12 months will support top line growth. Regarding China tariffs, the CEO commented during the call that they are a headwind to their margins but a problem they will offset. They already managed some tariffs headwinds in FY19 and don’t see FY20 being worse.
Initial FY20 guidance:
Organic revenue growth +/- 4%
EPS $5.44-5.50, which represents a 6-7% growth rate (ex-FX)
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]
$MDT.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109