MDT Medtronic plc Sector: Healthcare HOLD · MDT Medtronic plc Sector: Healthcare HOLD ......

Analysts: Aleck Boyd, Dario Munoz Poletti,

Bernadette Smith and Sara Specht

Washburn University

Applied Portfolio Management

Report Date: 4/18/2016

Market Cap (mm) $80,410 Annual Dividend $1.37 2‐Yr Beta (S&P 500 Index) 0.97 Medtronic plc

Return on Capital 13.4% Dividend Yield 1.9% Annualized Alpha 5.5% Compared With:

EPS (ttm) $1.77 Price/Earnings (ttm) 41.5 Institutional Ownership 6.4% Stryker Corporation

Current Price $73.40 Economic Value‐Added (ttm) $1,444 Short Interest (% of Shares) 1.1% Zimmer Biomet Holdings, Inc.

12‐mo. Target Price $87.50 Free Cash Flow Margin ‐26.9% Days to Cover Short 2.5 and the S&P 500 Index

Business Description

Total Revenue 7.5% Free Cash Flow ‐37.9%

EBIT 2.0% Total Invested Capital 21.9%

NOPAT ‐0.4% Total Assets 48.1%

Earnings Per Share ‐10.7% Economic Value‐Added ‐17.3%

Dividends Per Share 7.9% Market Value‐Added 12.0%

2011 2012 2013 2014 2015

28.5% 28.9% 28.7% 28.3% 24.6%

N/A ‐25.4% 16.4% 9.4% ‐26.9%

6.9% 9.1% 7.3% 5.3% 3.1%

2.2% 2.6% 2.2% 1.9% 1.6%

2011 2012 2013 2014 2015

2.87 3.43 3.40 3.06 2.44

0.90 0.97 1.04 1.12 1.22

3.42 3.66 3.80 3.95 3.47

N/A (3.91) 2.66 1.58 (4.94)

Datasource: Capital IQ

MDT Medtronic plc Sector: Healthcare HOLD

Free Cash Flow Margin

Medtronic plc manufactures and sells device‐based medical therapies

worldwide. The company’s Cardiac and Vascular Group segment offers

pacemakers, implantable cardioverter defibrillators, implantable cardiac

resynchronization therapy devices, AF products, diagnostics and monitoring

devices, and remote monitoring and patient‐centered software; and heart

valves, percutaneous coronary intervention stent products, surgical valve

replacement and repair products, endovascular stent grafts, and peripheral

vascular intervention products. Its Minimally Invasive Therapies Group

segment provides gastrointestinal diagnostics, ablation, and interventional

lung solutions; stapling vessel sealing and other surgical instruments;

Investment Thesis

Our analysis confirms that Medtronic has held up to the previous

investment thesis. The firm took on an aggressive acquisition plan that

resulted in risk and declines in bottom line profits. The most recent

acquisitions resulted in increasing Total Invested Capital, decreasing

returns on large uses of Free Cash Flow, and diminishing ROIC‐WACC

spread. The firm's long term strategic acquisition plan and historically

recession resistant products supports Medtronic's long‐term

fundamentals, which include increasing global demand for quality health

care, aging populations, and rising R&D outlays leading to a steady flow of

new diagnostic and therapeutic products. The companies’ per share

intrinsic value has signaled undervaluation. Medtronic's intentions to

expand to emerging markets, increase revenues, commit to dividend

growth, and positive future outlook justifies a hold on Medtronic stock.ANNUALIZED 3‐YEAR CAGR

Margins and Yields

Operating Margin

NOPAT

Free Cash Flow

Earnings Yield

Dividend Yield

Per Share Metrics

Earnings

Dividends

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2012 2013 2014 2015

Price/Earnings Price/Free Cash Flow

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2011 2012 2013 2014 2015

EBIT Net Operating Profit After Tax

$0$5,000$10,000$15,000$20,000$25,000$30,000$35,000$40,000$45,000

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2011 2012 2013 2014 2015

Economic Value‐Added Market Valued‐Added

0%5%10%15%20%25%30%35%40%45%50%

2011 2012 2013 2014 2015

ROA ROE ROIC

Medtronic plc MDT Sector Healthcare Stryker Corporation SYK Sector Healthcare

2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Total Revenue 15,508 16,184 16,569 16,893 20,126 Total Revenue 8,307 8,657 9,021 9,675 9,946

Cost of Goods Sold 3,689 3,889 4,095 4,211 5,536 Cost of Goods Sold 2,668 2,758 2,956 3,291 3,330

Gross Profit 11,819 12,295 12,474 12,682 14,590 Gross Profit 5,639 5,899 6,065 6,384 6,616

SG&A Expense 5,427 5,623 5,698 5,847 6,904 SG&A Expense 3,084 3,255 3,345 3,356 3,511

R&D Expense 1,472 1,490 1,557 1,477 1,640 R&D Expense 462 471 536 614 625

Dep. & Amort. 339 335 331 349 733 Dep. & Amort. 122 123 138 188 210

Other Oper. Exp. 162 169 135 224 355 Other Oper. Exp. 0 0 0 0 0

Operating Income 4,419 4,678 4,753 4,785 4,958 Operating Income 1,971 2,050 2,046 2,226 2,270

Interest Expense (450) (349) (388) (379) (666) Interest Expense (56) (63) (83) (113) (108)

Other Non‐Oper. Exp. 61 (195) 27 43 196 Other Non‐Oper. Exp. 22 (20) 15 (10) (36)

EBT ex‐Unusuals 4,202 4,334 4,629 4,720 4,874 EBT ex‐Unusuals 1,971 2,014 2,002 2,131 2,140

Total Unusual Exp. (538) (189) (378) (1,015) (1,388) Total Unusual Exp. (285) (309) (790) (971) (405)

Earnings Before Tax 3,664 4,145 4,251 3,705 3,486 Earnings Before Tax 1,686 1,705 1,212 1,160 1,735

Income Tax Expense 609 730 784 640 811 Income Tax Expense 341 407 206 645 296

Net Income 3,096 3,617 3,467 3,065 2,675 Net Income 1,345 1,298 1,006 515 1,439

Earnings per Share $2.87 $3.43 $3.40 $3.06 $2.44 Earnings per Share $3.48 $3.41 $2.66 $1.36 $3.82

Dividends per Share $0.90 $0.97 $1.04 $1.12 $1.22 Dividends per Share $0.75 $0.90 $1.10 $1.26 $1.42

Effective Tax Rate 16.62% 17.61% 18.44% 17.27% 23.26% Effective Tax Rate 20.23% 23.87% 17.00% 55.60% 17.06%

Total Common Shares 1,077 1,054 1,019 1,002 1,096 Total Common Shares 387 381 379 379 377

Year‐end Stock Price $41.75 $37.69 $46.36 $58.21 $77.61 Year‐end Stock Price $49.71 $54.82 $75.14 $94.33 $92.94996 997 998 999 1000 996 997 998 999 1000

Assets 2011 2012 2013 2014 2015 Assets 2011 2012 2013 2014 2015

Cash and Equivalents 1,382 1,172 919 1,403 4,843 Cash and Equivalents 905 1,395 1,339 1,795 3,379

Short‐Term Investments 1,046 8,132 10,161 12,771 14,560 Short‐Term Investments 2,513 2,890 2,641 3,205 700

Total Cash & ST Invest. 2,428 9,350 11,130 14,254 19,490 Total Cash & ST Invest. 3,418 4,285 3,980 5,000 4,079

Total Receivables 3,761 4,511 4,266 4,547 6,447 Total Receivables 1,417 1,430 1,518 1,572 1,664

Inventory 1,619 1,800 1,712 1,725 3,463 Inventory 1,283 1,265 1,422 1,588 1,639

Prepaid Expenses 541 601 594 603 943 Prepaid Expenses 312 354 514 494 494

Total Current Assets 9,150 16,336 17,852 21,210 30,844 Total Current Assets 7,207 8,148 8,335 8,684 7,944

Net PPE 2,488 2,473 2,490 2,392 4,699 Net PPE 888 948 1,081 1,098 1,199

Total Assets 30,675 32,818 34,900 37,943 106,685 Total Assets 12,146 13,206 15,743 17,279 16,247

Liabilities and Equity Liabilities and Equity

Accounts Payable 495 565 681 742 1,610 Accounts Payable 345 288 314 329 410

Accrued Expenses 2,058 1,854 2,037 2,918 4,011 Accrued Expenses 1,242 1,400 2,036 2,903 1,998

Short‐Term Debt 1,500 950 125 337 1,308 Short‐Term Debt 0 0 0 200 0

Total Current Liab. 4,726 5,927 3,950 5,559 9,173 Total Current Liab. 1,840 1,876 2,657 4,461 3,503

Long‐Term Debt 8,080 7,239 9,607 10,187 33,694 Long‐Term Debt 1,751 1,746 2,739 3,246 3,253

Total Liabilities 14,707 15,705 16,229 18,500 53,455 Total Liabilities 4,463 4,609 6,696 8,684 7,736

Preferred Equity 0 0 0 0 0 Preferred Equity 0 0 0 0 0

Common Stock & APIC 107 104 102 100 0 Common Stock & APIC 1,060 1,136 1,198 1,290 1,358

Retained Earnings 16,085 17,482 19,061 19,940 54,414 Retained Earnings 6,479 7,332 7,617 7,559 7,792

Treasury Stock 0 0 0 0 0 Treasury Stock 0 0 0 0 0

Total Common Equity 15,968 17,113 18,671 19,443 53,230 Total Common Equity 7,683 8,597 9,047 8,595 8,511

Total Equity 15,968 17,113 18,671 19,443 53,230 Total Equity 7,683 8,597 9,047 8,595 8,511

Total Liab. and Equity 30,675 32,818 34,900 37,943 106,685 Total Liab. and Equity 12,146 13,206 15,743 17,279 16,247

Income Statement Highlights

Balance Sheet Highlights

Income Statement Highlights

Balance Sheet Highlights

1. Margins and Profitability MDT, of 17 Copyright Robert A. Weigand, Ph.D., 2016

MDT Medtronic plc SYK Stryker Corporation

Profit Margins 2011 2012 2013 2014 2015 Profit Margins 2011 2012 2013 2014 2015

Gross Profit Margin 76.2% 76.0% 75.3% 75.1% 72.5% Gross Profit Margin 67.9% 68.1% 67.2% 66.0% 66.5%

Operating Profit Margin 28.5% 28.9% 28.7% 28.3% 24.6% Operating Profit Margin 23.7% 23.7% 22.7% 23.0% 22.8%

Net Profit Margin 20.0% 22.3% 20.9% 18.1% 13.3% Net Profit Margin 16.2% 15.0% 11.2% 5.3% 14.5%

Free Cash Flow Margin N/A ‐25.4% 16.4% 9.4% ‐26.9% Free Cash Flow Margin N/A 8.5% 25.4% 6.3% 17.5%

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2011 2012 2013 2014 2015

Gross Profit Margin MDT SYK

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2011 2012 2013 2014 2015

Operating Profit Margin MDT SYK

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Net Profit Margin MDT SYK

Gross Profit Margin: Gross profit margin shows gross profit as a percentage of revenue. Medtronic's gross profit is in a downtrend from 2011 to 2015, declining from 76.2% to 72.5%. Despite this downtrend, MDT's gross profit is large and above the industry average range of 57% to 71% according to Yahoo Finance. Stryker is in a downtrend from 2011 to 2014, with an increase of 0.5% in 2015. The decrease in the gross profit margin in 2015 signals that revenues are growing faster than gross profit. Medtronic is outperforming Stryker every year, indicating that a greater percentage of revenue is avaliable to flow towardMedtronic's bottom line profits, free cash flow that supports the firms intrinsic value, and back to investors in the form of dividends. Morningstar's report on Medtronic notes that, " while legacy Medtronic's gross margins have historically held firm at about 75%, the addition of Covidien has lowered this by roughly 600 basic points and we anticipate the company can eke out incremental improvement over the next four years". S&P analysts expect 2016 gross margin of 69.4%.

Operating Profit Margin: Operating profit margin illustrates operating profit as a percentage of revenue. Medtronic's operating profit margin is in a downtrend from 2011 to 2015, from 28.5% to 24.6%. Stryker has a 1% decrease from 2011 to 2015, however Medtronic is still outperforming Stryker every year. The approximately 4% decrease in Medtronic's operating profit margin is due to their revenues growing faster than their operating profit, and their downtrend signals that there is less cash avaliable to flow toward bottom line profits, free cash flow that supports the firm's intrinsic value, and back to the investors in the form of dividends. S&P analysts expect 2016 operating margin of 29.0%. Argus analysts note that foreign currency fluctuations had the following impact, "The 2Q operating margin was $28.4, which excludes a 10‐basis‐point negative currency impact. Exluding currency translation, the operating margin rose 20 basis point from the prior‐year quarter".

Net Profit Margin: Net profit margin expresses net income as a percentage of total revenues. Medtronic shows a downward trend from 22.3% in 2012 to13.3% 2015, where revenues are growing faster than net income. Strkyer's Net Profit Margin shows a downtrend from 16.2% in 2011 to 14.5% in 2014, yet in 2015 they outperform Medtronic, who had been outperforming them from 2011 to 2014. Medtronic's profits are not flowing to the bottom line effienctly.

Conclusion: Overall, Medtronic's gross profit margin, operating profit margin, and net profit margin are in a downtrend. They are not as efficient at making revenues flow to the bottom line. Medtronic's revenues are growing faster than their margins as growth in expenses has outpaced revenue growth. Argus reported that Medtronic shows a "one‐time tax adjustment and costs related to the integration of Covidien", this is reflected in the increase in the SG&A expenses on their income statement, and thus affecting how much profit is flowing to the bottom line. In their 10k it is stated that there are "additional taxes of $914 million plus penalties of $154 million based on audits of the 1991 to 2000 tax years of Tyco International". The $914 million is being classified as a SG&A expense for Medtronic. Medtronic's lower gross and operating margins indicate that a smaller precentage of revenue is available to flow toward bottom‐line profits, free cash flow that supports a firm's intrinsic value, and back to investors in the form of

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Free Cash Flow Margin MDT SYK



Profitability Ratios 2011 2012 2013 2014 2015 Profitability Ratios 2011 2012 2013 2014 2015

Net Profit Margin 20.0% 22.3% 20.9% 18.1% 13.3% Net Profit Margin 16.2% 15.0% 11.2% 5.3% 14.5%

× Total Asset Turnover 0.5 0.5 0.5 0.4 0.2 × Total Asset Turnover 0.7 0.7 0.6 0.6 0.6

= Return on Assets 10.1% 11.0% 9.9% 8.1% 2.5% = Return on Assets 11.1% 9.8% 6.4% 3.0% 8.9%

× Equity Multiplier 1.9 1.9 1.9 2.0 2.0 × Equity Multiplier 1.6 1.5 1.7 2.0 1.9

= Return on Equity 19.4% 21.1% 18.6% 15.8% 5.0% = Return on Equity 17.5% 15.1% 11.1% 6.0% 16.9%

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Total Asset Turnover MDT SYK

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Return on Equity MDT SYK

Total Asset Turnover: The total asset turnover is the percentage of revenue that is generated by total assets. Medtronic is experiencing a downtrend from 2013 to 2015; this is due to total assets growing faster than revenues. Stryker is in a downtrend from 2011 through 2014, before increasing in 2015 and outperforming Medtronic every year. The downtrend signals that Medtronic is generating fewer revenues per dollar of assets. The acquisition of Covidien has not yet resulted in proportionately higher revenues.

Return on Assets: Return on assets is net income as a percentage of assets. Medtronic's ROA is in a downtrend from 2012 through 2015 due to a decrease in net profit margin and total asset turnover. Stryker's ROA shows a downtrend from 2011 to 2014, then increasing in 2015 and outperforming Medtronic. Medtronic's performance above Stryker from 2012 to 2014, shows Stryker is generating less net income per dollar of assets until 2015 where Stryker shows a higher efficiency at producing more net income per dollar of assets.

Return on Equity: Return on equity is net income as a percentage of shareholder's equity. Medtronic's ROE is in a downtrend from 2012 to 2015 due to a decrease in net profit margin and total asset turnover since the equity multiplier remains constant. Stryker's ROE shows a downtrend from 2011 to 2014, then increases in 2015 and outperforms Medtronic. Medtronic outperforms Stryker from 2011 to 2014, but by decreasing significantly in 2015 Medtronic's ROE is expressing less dollars of profit relative to the capital contributions by shareholders than Stryker in 2015.

Conclusion: Overall, Medtronic's ROA and ROE have been in a downtrend since 2011 due to Medtronic growing their revenue less than proportionally to their assets. Medtronic's net profit margin and total asset turnover are in a downtrend, their net profit margin dropped form 20.0% in 2011 to 13.3% in 2015 as well as their total asset turnover decreasing form 0.5 in 2011 to 0.2 in 2015. Due to the trends in net profit margin and total asset turnover, this decreased Medtronic's ROA form 10.1% in 2011 to 2.5% in 2015, thus signaling that Medtronic is generating less net income per dollar of assets. Medtronic's ROA in 2015 is below the industry average of 8.3% (Yahoo Finance). ROA and ROE move together in a downward trend, with Medtronic's ROE falling from 19.4% in 2011 to 5.0% in 2015. Most of the decrease in total asset turnover can be explained by a higher growth in total assets due to the increase of intangible assets (28.1) and goodwill (40.5) from the Covidien acquisition (see 10 k page 65).

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Equity Multiplier MDT SYK



Multiples and Yields 2011 2012 2013 2014 2015 Multiples and Yields 2011 2012 2013 2014 2015

Price/Earnings 14.5 11.0 13.6 19.0 31.8 Price/Earnings 14.3 16.1 28.3 69.3 24.3

Price/Book 1.5 1.2 1.4 1.5 0.8 Price/Book 1.6 1.6 1.8 2.1 2.2

Price/Free Cash Flow N/A N/A 17.4 36.9 N/A Price/Free Cash Flow N/A 28.2 12.4 58.2 20.2

Earnings Yield 6.9% 9.1% 7.3% 5.3% 3.1% Earnings Yield 7.0% 6.2% 3.5% 1.4% 4.1%

Dividend Yield 2.2% 2.6% 2.2% 1.9% 1.6% Dividend Yield 1.5% 1.6% 1.5% 1.3% 1.5%

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Earnings Yield MDT SYK

Price to earnings ratio: The price to earnings ratio expresses a stock's price as a multiple of its earnings over the past 12 trailing months. Medtronics's P/E ratio is increasing from 2012 to 2015 and peaks out of the reasonable range of 12 to 18. Stryker's P/E ratio stays within the reasonable range until 2013 and remains above this range through 2015. The rise in Medtronic's P/E is due to an increasing stock price in 2015 and a decreasing earnings per share. This indicates potential concern for possible overvaluation.Earnings yield: The earnings yield, the reciprical of its P/E ratio, expresses EPS as a percentage of the stock price. Medtronic's earnings yield is in a downward trend from 9.1% in 2012 to 3.1% in 2015 as the stock price grows faster than its earnings. Stryker's earnings yield is in a downward trend from 6.2% in 2012 to 4.1% in 2014 as the stock price grows faster than its earnings. Medtronic's and Stryker's lower earnings yield indicate that the market is pricing their stock more expensive relative to its earnings. Dividend yield: Dividend yield expresses the annual dividend per share as a percentage of the stock price. Medtronic's decline in dividend yield from 2012 to 2015, shows that the market is pricing the stock more expensive relative to it's dividend per share. Stryker's dividend yield is also in a downtrend form 2012 to 2014, with a slight uptick in 2015 but remaining below 2%.Conclusion: Overall, earnings yield, and dividend yield are decreasing for Medtronic. This is largely due to the rising stock price's role in the metrics where the market is pricing the stock more expensive relative to the EPS and DPS. Medtronic's dividend yield falls below 2% which is too low based on our preference for strong dividend payers.

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Price to Book MDT SYK

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Price to Free Cash Flow MDT SYK

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2. Relative Valuation and Debt MDT, of 17 Copyright Robert A. Weigand, Ph.D., 2016


Liquidity and Debt 2011 2012 2013 2014 2015 Liquidity and Debt 2011 2012 2013 2014 2015

Current Ratio 1.94 2.76 4.52 3.82 3.36 Current Ratio 3.92 4.34 3.14 1.95 2.27

Quick Ratio 1.59 2.45 4.09 3.51 2.98 Quick Ratio 3.22 3.67 2.60 1.59 1.80

Days Sales Outstanding 88.52 101.74 93.98 98.25 116.92 Days Sales Outstanding 62.26 60.29 61.42 59.31 61.07

Inventory Turnover 9.58 8.99 9.68 9.79 5.81 Inventory Turnover 6.47 6.84 6.34 6.09 6.07

Total Debt to Assets 31.2% 25.0% 27.9% 27.7% 32.8% Total Debt to Assets 14.4% 13.2% 17.4% 19.9% 20.0%

Long‐Term Debt to Equity 50.6% 42.3% 51.5% 52.4% 63.3% Long‐Term Debt to Equity 22.8% 20.3% 30.3% 37.8% 38.2%

Times Interest Earned 9.82 13.40 12.25 12.63 7.44 Times Interest Earned 35.20 32.54 24.65 19.70 21.02

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Current Ratio MDT SYK

Analyst Comments: Current Ratio: The current ratio measures the firm’s ability to meet short term obligations. Medtronic has been in a downward trend from 2013 through 2015 from 4.52 to 3.36. Stryker has been in a downtrend since 2012 to 2014, and has been underperforming Medtronic since 2013.Both companies are still above 1.0 and able to meet all of their short term obligations.

Total Debt to Assets: Total debt to assets is the percentage of total debt to total assets. Medtronic's total debt to assets have been increasing since 2012, having a higher ratio than Stryker every year. Medtronic's high ratio expresses that Medtornics is incurring more debt to finance their recent acquisitions.

Conclusion: Both Stryker and Medtronics are maintaining a current ratio above 1.0 which illustrates that both companies are able to meet their short term obligations. Medtronic's increasing total debt to assets can be attributed to their recent acquisitions.

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Total Debt to Assets MDT SYK

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Total Debt to Assets Long-Term Debt to Equity

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Total Debt to Assets Long-Term Debt to Equity

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Long-Term Debt to Equity MDT SYK

2. Relative Valuation and Debt MDT, of 17 Copyright Robert A. Weigand, Ph.D., 2016


Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2011 2012 2013 2014 2015

Total Cash and ST Investments 2,428 9,350 11,130 14,254 19,490 Total Cash and ST Investments 3,418 4,285 3,980 5,000 4,079

+ Receviables 3,761 4,511 4,266 4,547 6,447 + Receviables 1,417 1,430 1,518 1,572 1,664

+ Inventory 1,619 1,800 1,712 1,725 3,463 + Inventory 1,283 1,265 1,422 1,588 1,639

− Accounts Payable 495 565 681 742 1,610 − Accounts Payable 345 288 314 329 410

− Accrued Expenses 2,058 1,854 2,037 2,918 4,011 − Accrued Expenses 1,242 1,400 2,036 2,903 1,998

= Net Oper. Working Capital 5,255 13,242 14,390 16,866 23,779 = Net Oper. Working Capital 4,531 5,292 4,570 4,928 4,974

+ Net Property, Plant & Equip. 2,488 2,473 2,490 2,392 4,699 + Net Property, Plant & Equip. 888 948 1,081 1,098 1,199

= Total Invested Capital 7,743 15,715 16,880 19,258 28,478 = Total Invested Capital 5,419 6,240 5,651 6,026 6,173

÷ Total Weighted Shares 1,077 1,054 1,019 1,002 1,096 ÷ Total Weighted Shares 387 381 379 379 377

= Total Invested Capital/Share $7.19 $14.91 $16.56 $19.22 $26.00 = Total Invested Capital/Share $14.02 $16.40 $14.93 $15.92 $16.39


NOPAT and Free Cash Flow 2011 2012 2013 2014 2015 NOPAT and Free Cash Flow 2011 2012 2013 2014 2015

Operating Income (EBIT) 4,419 4,678 4,753 4,785 4,958 Operating Income (EBIT) 1,971 2,050 2,046 2,226 2,270

× (1−Effective Tax Rate) 16.6% 17.6% 18.4% 17.3% 23.3% × (1−Effective Tax Rate) 20.2% 23.9% 17.0% 55.6% 17.1%

= Net Oper. Profit After Tax 3,685 3,854 3,876 3,958 3,805 = Net Oper. Profit After Tax 1,572 1,561 1,698 988 1,883

− ∆ Total Invested Capital N/A 7,972 1,165 2,378 9,220 − ∆ Total Invested Capital N/A 821 (589) 375 147

= Free Cash Flow N/A (4,118) 2,711 1,580 (5,415) = Free Cash Flow N/A 740 2,287 613 1,736

NOPAT per Share $3.42 $3.66 $3.80 $3.95 $3.47 NOPAT per Share $4.07 $4.10 $4.49 $2.61 $5.00

Free Cash Flow per Share N/A ($3.91) $2.66 $1.58 ($4.94) Free Cash Flow per Share N/A $1.94 $6.04 $1.62 $4.61

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2011 2012 2013 2014 2015

Net Property, Plant & Equip. Total Invested Capital

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2011 2012 2013 2014 2015

Net Property, Plant & Equip. Total Invested Capital

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

2011 2012 2013 2014 2015

Total Invested Capital per Share MDT SYK

($6,000)

($4,000)

($2,000)

$0

$2,000

$4,000

$6,000

2012 2013 2014 2015

Net Operating Profit After Tax Free Cash Flow

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

2012 2013 2014 2015

NOPAT per Share MDT SYK

$0

$500

$1,000

$1,500

$2,000

$2,500

2012 2013 2014 2015

Net Operating Profit After Tax Free Cash Flow

Total Invested Capital: Total invested capital is the addition of net operating working capital and long term operating assets. Medtronic's total invested capital is showing an uptrend from 2011 to 2015. Medtronic's total invested capital

per share exceeds Stryker's from 2013 to 2015. Medtronic has had a substantial increase in their net operating working capital and their net PP&E, while Stryker’s net operating working capital and net PP&E increased at a less significant

rate. Free Cash Flow/Share: Medtronic's free cash flow/share is negative in 2012 and 2015 when the change in total invested capital is greater than NOPAT. Stryker's free cash flow/share decreases in 2012 and 2014, and starts increasing

again in 2015. Medtronic's negative free cash flow/share signals that there is less free NOPAT to pay out to investors since it has been spent on acquiring new assets, and these newly acquired have yet to generate substantial revenues.

NOPAT/share: Medtronic's NOPAT/share has been in an up trending pattern until 2015 where NOPAT deceases as the number of shares increases. Stryker's NOPAT/share is increasing from 2012 to 2013, deceasing in 2014, and starting

to increase again in 2015. The increase in NOPAT for Stryker can be attributed to a decrease in their tax rate form 55.6% in 2014 to 17.1% in 2015 showing an increase in tax efficiency, while Medtronic was experiencing special tax

3. Value Creation and DCF Model MDT, of 17 Copyright Robert A. Weigand, Ph.D., 2016


Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted %

Equity Capitalization $85,022 70.8% 10.120% 7.169% Equity Capitalization $35,001 91.5% 7.571% 6.927%

+ Total Debt $35,002 29.2% 5.000% 1.119% + Total Debt $3,253 8.5% 5.000% 0.353%

+ Preferred Stock $0 0.0% 0.000% 0.000% + Preferred Stock $0 0.0% 0.000% 0.000%

= Value of All Securities $120,024 100.0% = Value of All Securities $38,254 100.0%

Effective Tax Rate 23.26% Alternative RF Rate: Effective Tax Rate 17.06% Alternative RF Rate:

Risk‐Free Rate 1.720% 1.720% 2.275% Risk‐Free Rate 1.720% 1.720% 2.275%

Beta (5‐Yr) 1.200 Alternative Beta: 1.01478 Beta (5‐Yr) 0.836 Alternative Beta: 0.83581

Market Risk Premium 7.0% 1.200 Market Risk Premium 7.0%

CAPM Cost of Equity 10.120% CAPM Cost of Equity 7.571%

Weighted Average Cost of Capital: 8.288% Weighted Average Cost of Capital: 7.280%

8.288% 8.288% 8.288% 8.288% 8.288%


ROIC, EVA and MVA 2011 2012 2013 2014 2015 ROIC, EVA and MVA 2011 2012 2013 2014 2015

Return on Invested Capital 47.6% 24.5% 23.0% 20.6% 13.4% Return on Invested Capital 29.0% 25.0% 30.1% 16.4% 30.5%

Economic Value‐Added 3,043 2,552 2,477 2,362 1,444 Economic Value‐Added 1,178 1,106 1,287 550 1,433

Market Valued‐Added 29,013 22,608 28,584 38,889 31,792 Market Valued‐Added 11,530 12,267 19,401 27,109 26,490

EVA per Share $2.82 $2.42 $2.43 $2.36 $1.32 EVA per Share $3.05 $2.91 $3.40 $1.45 $3.81

MVA per Share $26.93 $21.45 $28.04 $38.81 $29.02 MVA per Share $29.83 $32.23 $51.24 $71.62 $70.34

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

2011 2012 2013 2014 2015

EVA per Share MDT SYK

05,00010,00015,00020,00025,00030,00035,00040,00045,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2011 2012 2013 2014 2015

Economic Value-Added Market Valued-Added

0

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25,000

30,000

0

200

400

600

800

1,000

1,200

1,400

1,600

2011 2012 2013 2014 2015

Economic Value-Added Market Valued-Added

ROIC: Return on invested capital measures how much NOPAT a firm generates per dollar of invested capital. Medtronic experiences a downtrend in ROIC from 2011 to 2015 from 47.6% to 13.4%respectively. Stryker's ROIC decreases in 2012 and 2014, they outperform Medtronic in 2012, 2013, and 2015 generating more NOPAT per dollar of total invested capital. Medtronic is experiencing a decrease in how much NOPAT has been generated per dollar of invested capital. Medtronic is still beating the WACC even with the decline in ROIC meaning they are still in a position to generate value. EVA/share: EVA/share measures how much economic value a firm has created on a year‐by‐year basis per share. Medtronic's EVA/share is in a downward trend from 2011 to 2015, showing that the cost of capital had increased more than the NOPAT the firm generates. Stryker's EVA per share is on an upward trend, except for the decrease in 2014, signaling that they are generating more NOPAT than the cost of capital in dollars. To conclude,Medtronic's EVA is in a downward trend and showing that total invested capital increased as well as a small increase in the number of shares with less economic profit being created. Thus, a rising stock price with a corresponding decrease in EVA signals potential overvaluation.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2011 2012 2013 2014 2015

Return on Invested Capital MDT SYK

0%

10%

20%

30%

40%

50%

2011 2012 2013 2014 2015

Return on Invested Capital Return on Equity

0%

5%

10%

15%

20%

25%

30%

35%

2011 2012 2013 2014 2015

Return on Invested Capital Return on Equity


Long‐Term Growth Rate: Long‐Term Growth Rate:

MDT Medtronic plc 1.0% SYK Stryker Corporation 3.0%

Intrinsic Value Model 2011 2012 2013 2014 2015 Intrinsic Value Model 2011 2012 2013 2014 2015

PV of Future FCFs ‐58,767 ‐59,519 ‐67,163 ‐74,310 ‐75,053 PV of Future FCFs 36,023 37,906 38,378 40,559 41,776

+ Value of Non‐Oper. Assets 2,428 9,304 11,080 14,174 19,403 + Value of Non‐Oper. Assets 3,418 4,285 3,980 5,000 4,079

= Total Intrinsic Firm Value ‐56,339 ‐50,215 ‐56,083 ‐60,136 ‐55,650 = Total Intrinsic Firm Value 39,441 42,191 42,358 45,559 45,855

− Total Debt 9,580 8,189 9,732 10,524 35,002 − Total Debt 1,751 1,746 2,739 3,446 3,253

= Intrinsic Value of Equity ‐65,919 ‐58,404 ‐65,815 ‐70,660 ‐90,652 = Intrinsic Value of Equity 37,690 40,445 39,619 42,113 42,602

÷ Total Weighted Shares 1,077 1,054 1,019 1,002 1,096 ÷ Total Weighted Shares 387 381 379 379 377

= Per Share Intrinsic Value ‐$61.18 ‐$55.42 ‐$64.57 ‐$70.51 ‐$82.75 = Per Share Intrinsic Value $97.52 $106.27 $104.65 $111.26 $113.12

vs. Year‐End Stock Price $41.75 $37.69 $46.36 $58.21 $77.61 vs. Year‐End Stock Price $49.71 $54.82 $75.14 $94.33 $92.94

Over (Under) Valuation/Share $102.93 $93.11 $110.93 $128.72 $160.36 Over (Under) Valuation/Share ($47.81) ($51.45) ($29.51) ($16.93) ($20.18)

% Over (Under) Valued ‐168.2% ‐168.0% ‐171.8% ‐182.6% ‐193.8% % Over (Under) Valued ‐49.0% ‐48.4% ‐28.2% ‐15.2% ‐17.8%

‐$100‐$80‐$60‐$40‐$20$0$20$40$60$80

$100

2011 2012 2013 2014 2015

Year-End Stock Price Per Share Intrinsic Value

‐200%‐195%‐190%‐185%‐180%‐175%‐170%‐165%‐160%‐155%

$0$20$40$60$80

$100$120$140$160$180

2011 2012 2013 2014 2015

$ Over (Under) Valued % Over (Under) Valued

$0

$20

$40

$60

$80

$100

$120

2011 2012 2013 2014 2015


‐60%

‐50%

‐40%

‐30%

‐20%

‐10%

0%

($60)

($50)

($40)

($30)

($20)

($10)

$0

2011 2012 2013 2014 2015


$0

$10

$20

$30

$40

$50

$60

$70

$80

2011 2012 2013 2014 2015

MVA per Share MDT SYK

Analyst Comments: MVA/share: MVA/share measures value creation over the entire life time of the firm. Medtronic's MVA/share is in an upward trend form 2012 to 2014 and decreasing in 2015. Stryker is in an upward trend until dropping in 2015. Stryker has a higher MVA/share than Medtronic, expressing an increase in the value of capital contrubutions to the firm by shareholders.

ROIC vs. WACC: Medtronic's ROIC is on a decreasing trend which is shorting the gap between the ROIC and WACC, that can be attributed increases in total invested capital. The diminishing gap between ROIC and WACC singals that the firm is decreasing its ability to generate economic profit on it's investments.

Conclusion: Medtronic's MVA per share decline expresses how genuine value creation has decreased in 2015. The investments in acquisition increased total invested capital, higher than NOPAT, caused a lower return on the invested capital that decreased the ROIC‐WACC spread showing a decrease in Medtronic's ability to generate economic profit on it's investments.

0%

10%

20%

30%

40%

50%

2011 2012 2013 2014 2015

Return on Invested Capital WACC



Piotroski Financial Fitness Scorecard 2012 2013 2014 2015 Piotroski Financial Fitness Scorecard 2012 2013 2014 2015

Positive Net Income 1 1 1 1 Positive Net Income 1 1 1 1

Positive Free Cash Flow 0 1 1 0 Positive Free Cash Flow 1 1 1 1

Growing ROA (% change NI > % change TA) 1 0 0 0 Growing ROA (% change NI > % change TA) 0 0 0 1

Earnings Quality (Operating Income > Net Income) 1 1 1 1 Earnings Quality (Operating Income > Net Income) 1 1 1 1

Total Assets Growing Faster Than Total Liabilities 1 1 0 0 Total Assets Growing Faster Than Total Liabilities 1 0 0 1

Increasing Liquidity (Current Ratio) 1 1 0 0 Increasing Liquidity (Current Ratio) 1 0 0 1

% Change Shares Outstanding < +2.0% 1 1 1 0 % Change Shares Outstanding (Diluted) < +2.0% 1 1 1 1

Expanding Operating Margin 1 0 0 0 Expanding Operating Margin 0 0 1 0

Asset Turnover (% change sales > % change assets) 0 0 0 0 Asset Turnover (% change sales > % change assets) 0 0 0 1

Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 0 Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1

Piotroski Score (max = 10) 8 7 5 2 Piotroski Score (max = 10) 7 5 6 9


Altman Probability of Bankruptcy Z‐Score 2012 2013 2014 2015 Altman Probability of Bankruptcy Z‐Score 2012 2013 2014 2015

(Current Assets‐Current Liabilities)/Total Assets 0.3806 0.4780 0.4950 0.2438 ## (Current Assets‐Current Liabilities)/Total Assets 0.5699 0.4328 0.2933 0.3280

Retained Earnings/Total Assets 0.6392 0.6554 0.6306 0.6121 ## Retained Earnings/Total Assets 0.6662 0.5806 0.5250 0.5755

Earnings Before Interest & Tax/Total Assets 0.4704 0.4494 0.4162 0.1534 ## Earnings Before Interest & Tax/Total Assets 0.5123 0.4289 0.4251 0.4611

Market Value Equity/Total Liabilities 1.5175 1.7470 1.8919 0.9543 ## Market Value Equity/Total Liabilities 2.7161 2.5491 2.4669 2.7147

Sales/Total Assets 0.4927 0.4743 0.4448 0.1885 ## Sales/Total Assets 0.6549 0.5724 0.5594 0.6116

Altman Score 3.50 3.80 3.88 2.15 Altman Score 5.12 4.56 4.27 4.69

Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23


29‐Apr‐11 27‐Apr‐12 26‐Apr‐13 25‐Apr‐14 24‐Apr‐15

Medtronic plc MDT Healthcare Report Date:

Average

2011 2012 2013 2014 2015 2011 ‐ 2015 2016E 2017E 2018E 2019E 2020E

Total Revenue 15,508 16,184 16,569 16,893 20,126 Total Revenue 27,975 28,675 29,391 29,979 30,279

% growth N/A 4.4% 2.4% 2.0% 19.1% 6.7% % growth 39.0% 2.5% 2.5% 2.0% 1.0%

Gross Profit 11,819 12,295 12,474 12,682 14,590 Gross Profit 18,743 19,212 19,692 20,086 20,287

Gross Margin (% of sales) 76.2% 76.0% 75.3% 75.1% 72.5% 75.0% Gross Margin (% of sales) 67.0% 67.0% 67.0% 67.0% 67.0%


Operating Margin (% of sales) 28.5% 28.9% 28.7% 28.3% 24.6% 27.8% Operating Margin (% of sales) 26.0% 26.5% 27.0% 27.5% 28.0%

Earnings Before Tax 3,664 4,145 4,251 3,705 3,486

Income Tax Expense 609 730 784 640 811 Forecasted Effective Tax Rate 17.0% 17.0% 17.0% 17.0% 17.0%

Effective Tax Rate 16.6% 17.6% 18.4% 17.3% 23.3% 18.6% Effective Tax Rate Adjustment 17.0% 17.0% 17.0% 17.0% 17.0%

Net Income 3,096 3,617 3,467 3,065 2,675 Net Income 5,036 5,018 4,997 4,947 4,845

Net Margin (% of sales) 20.0% 22.3% 20.9% 18.1% 13.3% 18.9% Net Margin (% of sales) 18.0% 17.5% 17.0% 16.5% 16.0%

Total Common Shares 1,077 1,054 1,019 1,002 1,096 Total Common Shares 1,090 1,085 1,074 1,063 1,047

% growth N/A ‐2.2% ‐3.3% ‐1.7% 9.3% 0.4% % growth ‐0.5% ‐0.5% ‐1.0% ‐1.0% ‐1.5%

Earnings per Share $2.87 $3.43 $3.40 $3.06 $2.44 Earnings per Share $4.62 $4.63 $4.65 $4.65 $4.63

Dividends per Share $0.90 $0.97 $1.04 $1.12 $1.22 Dividends per Share $1.31 $1.40 $1.49 $1.58 $1.63

% growth N/A 7.8% 7.2% 7.7% 8.9% 7.9% % growth 7.5% 7.0% 6.5% 6.0% 3.0%

Year‐end Stock Price $41.75 $37.69 $46.36 $58.21 $77.61996 997 998 999 1000 996 997 998 999 1000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Cash + ST Investments 2,428 9,350 11,130 14,254 19,490 Cash + ST Investments 17,624 18,065 18,517 18,887 19,076

% of sales 15.7% 57.8% 67.2% 84.4% 96.8% 64.4% % of sales 63.0% 63.0% 63.0% 63.0% 63.0%

Total Receivables 3,761 4,511 4,266 4,547 6,447 Total Receivables 7,553 7,742 7,936 8,094 8,175

% of sales 24.3% 27.9% 25.7% 26.9% 32.0% 27.4% % of sales 27.0% 27.0% 27.0% 27.0% 27.0%

Inventory 1,619 1,800 1,712 1,725 3,463 Inventory 3,077 3,154 3,233 3,298 3,331

% of sales 10.4% 11.1% 10.3% 10.2% 17.2% 11.9% % of sales 11.0% 11.0% 11.0% 11.0% 11.0%

Net PPE 2,488 2,473 2,490 2,392 4,699 Net PPE 5,595 5,735 5,878 5,996 6,056

% of sales 16.0% 15.3% 15.0% 14.2% 23.3% 16.8% % of sales 20.0% 20.0% 20.0% 20.0% 20.0%

Total Assets 30,675 32,818 34,900 37,943 106,685 Total Assets 107,704 110,397 113,157 115,420 116,574

% of sales 197.8% 202.8% 210.6% 224.6% 530.1% 273.2% % of sales 385.0% 385.0% 385.0% 385.0% 385.0%

Payables and Accruals 2,553 2,419 2,718 3,660 5,621 Payables and Accruals 5,315 5,448 5,584 5,696 5,753

% of sales 16.5% 14.9% 16.4% 21.7% 27.9% 19.5% % of sales 19.0% 19.0% 19.0% 19.0% 19.0%

ST Debt plus LT Debt 9,580 8,189 9,732 10,524 35,002 ST Debt plus LT Debt 23,499 24,087 24,689 25,183 25,434

% of sales 61.8% 50.6% 58.7% 62.3% 173.9% 81.5% % of sales 84.0% 84.0% 84.0% 84.0% 84.0%

Total Equity 15,968 17,113 18,671 19,443 53,230 Total Equity 36,368 37,277 38,209 38,973 39,363

% of sales 103.0% 105.7% 112.7% 115.1% 264.5% 140.2% % of sales 130.0% 130.0% 130.0% 130.0% 130.0%

April 18, 2016

Forecasted Income Statement Drivers

Forecasted Balance Sheet Drivers

Historical Income Statement Drivers

Historical Balance Sheet Drivers

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total Revenue Operating Income (EBIT) Total Revenue Growth: 2015 revenue growth is affected by having only one quarter of Covidien reflected on Medtronic’s income statement. The S&P is projecting total revenue growth of 41.83% in 2016, 3.75% in 2017, and 4.72% in 2018. The model above takes a conservative approach with forcasting total revenue growth of 39% in 2016, 2.5% in both 2017 and 2018, 2% in 2019, and tappering down the long term perpetual growth rate to 1% which reflects a margin of safety.Gross Profit Margin: S&P analysts are predicting that the gross margin is going to decrease to 69% due to the Covidien acquisition, but expect them to rebound to 69.82% in 2018 , yet the forecast takes a conservative approach. The starting point of 67% incorporated a margin of safety, and is kept constant due to the expected increase by analyst. EBIT: Analyst at S&Ppredicted 28.72% operating margin, taking a conservative stand point and margin of safety it steadily increases from 26% to 28%. Net Income: Analyst are forecasting an increase in net income (S&P Capital IQ) from 21.75% in 2016, 23.01% in 2017, and 24.11% in 2018; however, the model reflects a more conservative forecast and shows it decreasing from 18% in 2016 to 16% in 2020. The forecasting reflects a downward trend due to Medtronic's behavior from 2012 to 2015, however the decrease in net profit margin in 2015 was due to the one time increase in the effective tax rate from the Covidian acquisition. The model operates under the assumption that Medtronic will continue with the historical pattern of a deceasing net profit margin. Total Common Shares: Medtronic's 10‐k states that they are taking place in a repurchasing program, however there is no specified time frame for this but the amount is $41 million. Due to the lack of a time frame the model reflects Medtronic slowly repurchasing common stock, and increasing over the years.Dividend/share: There is a margin of safety and the model is conservative due to their past history of paying dividends. The Morningstar report states that their expectations for dividends per share % growth is 8.9% in 2016 and having a 3‐year growth rate of 7.9%. Cash: Due to a repurchasing program, forecasted at a constant 63% as a percentage of sales. Net PPE: Due to expansion efforts it is forecasted that net PPE will increase and remain constant above the historical

4. Forecasting and Valuation MDT, of 17 Copyright Robert A. Weigand, Ph.D., 2016

Medtronic plc Medtronic plc

Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2016E 2017E 2018E 2019E 2020E

Cash and ST Investments 2,428 9,350 11,130 14,254 19,490 Cash and ST Investments 17,624 18,065 18,517 18,887 19,076

+ Receviables 3,761 4,511 4,266 4,547 6,447 + Receviables 7,553 7,742 7,936 8,094 8,175

+ Inventory 1,619 1,800 1,712 1,725 3,463 + Inventory 3,077 3,154 3,233 3,298 3,331

− Payables and Accruals 2,553 2,419 2,718 3,660 5,621 − Payables and Accruals 5,315 5,448 5,584 5,696 5,753

= Net Oper. Working Capital 5,255 13,242 14,390 16,866 23,779 = Net Oper. Working Capital 22,940 23,513 24,101 24,583 24,829

+ Net Property, Plant & Equip. 2,488 2,473 2,490 2,392 4,699 + Net Property, Plant & Equip. 5,595 5,735 5,878 5,996 6,056

= Total Invested Capital 7,743 15,715 16,880 19,258 28,478 = Total Invested Capital 28,535 29,248 29,979 30,579 30,885

÷ Total Common Shares 1,077 1,054 1,019 1,002 1,096 ÷ Total Common Shares 1,090 1,085 1,074 1,063 1,047

= Total Invested Capital/Share $7.19 $14.91 $16.56 $19.22 $26.00 = Total Invested Capital/Share $26.18 $26.97 $27.92 $28.77 $29.50


NOPAT and Free Cash Flow 2011 2012 2013 2014 2015 NOPAT and Free Cash Flow 2016E 2017E 2018E 2019E 2020E


× (1−Effective Tax Rate) 16.6% 17.6% 18.4% 17.3% 23.3% × (1−Effective Tax Rate) 17.0% 17.0% 17.0% 17.0% 17.0%

= Net Oper. Profit After Tax 3,685 3,854 3,876 3,958 3,805 = Net Oper. Profit After Tax 6,037 6,307 6,587 6,843 7,037

− ∆ Total Invested Capital N/A 7,972 1,165 2,378 9,220 − ∆ Total Invested Capital 57 713 731 600 306

= Free Cash Flow N/A (4,118) 2,711 1,580 (5,415) = Free Cash Flow 5,980 5,594 5,855 6,243 6,731

NOPAT per Share $3.42 $3.66 $3.80 $3.95 $3.47 NOPAT per Share $5.54 $5.82 $6.13 $6.44 $6.72

Free Cash Flow per Share N/A ($3.91) $2.66 $1.58 ($4.94) Free Cash Flow per Share $5.49 $5.16 $5.45 $5.87 $6.43

Historical Performance Forecasted Performance


Analyst Comments:FCF/Share: Medtronic FCF shows an upward trend from 2017 to 2020 due to smaller incremental changes in total invested capital that are smaller than NOPAT. There is more FCF that supports the fims intrinsic value.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total Invested Capital Net Fixed Assets

($8,000)

($6,000)

($4,000)

($2,000)

$0

$2,000

$4,000

$6,000

$8,000

2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

NOPAT Free Cash Flow

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Earnings per Share Dividends per Share

0%10%20%30%40%50%60%70%80%90%

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E


0%

5%

10%

15%

20%

25%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Net Profit Margin Effective Tax Rate (right axis)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total Invested Capital Net Operating Working Capital


Medtronic plc

Cost of Capital 2015 Weight % Cost Weighted % Medtronic plc

Equity Capitalization $85,022 70.8% 7.103% 5.032%

+ Total Debt $35,002 29.2% 5.000% 1.210% Year 2016E 2017E 2018E 2019E 2020E

= Value of All Securities $120,024 100.0% Dividend Growth Rates 7.5% 7.0% 6.5% 6.0% 3.0%

Expected Future Dividends $1.31 $1.40 $1.49 $1.58 $1.63

Effective Tax Rate 17.00% Alternative RF Rate:

Risk‐Free Rate 1.760% 2.275% PV Dividends 1‐4 $4.87 Dividend Yield 1.8%

Beta (5‐Yr) 1.015 Alternative Beta: 1.01478 PV Perpetual Div. $30.22

Market Risk Premium 7.0% Intrinsic Value $35.09 If Purchased For: $73.40

CAPM Cost of Equity 7.103% Current Price $73.40 Expected Return = ‐11.7%

Weighted Average Cost of Capital: 6.242% ($73.40) $1.31 $1.40 $1.49 $41.35 $39.766.242% 6.242% 6.242% 6.242% 6.242% 6.242% 6.242% 6.242% 6.242% 6.242%


ROIC, EVA and MVA 2011 2012 2013 2014 2015 ROIC, EVA and MVA 2016E 2017E 2018E 2019E 2020E

Return on Invested Capital 47.6% 24.5% 23.0% 20.6% 13.4% Return on Invested Capital 21.2% 21.6% 22.0% 22.4% 22.8%

Economic Value‐Added 3,201 2,873 2,823 2,756 2,027 Economic Value‐Added 4,256 4,481 4,715 4,934 5,109

Market Valued‐Added 29,013 22,608 28,584 38,889 31,792 Market Valued‐Added 43,640 81,501 82,354 83,134 83,965

EVA per Share $2.97 $2.73 $2.77 $2.75 $1.85 EVA per Share $3.90 $4.13 $4.39 $4.64 $4.88

MVA per Share $26.93 $21.45 $28.04 $38.81 $29.02 MVA per Share $40.04 $75.15 $76.70 $78.21 $80.19

Perpetual Growth Rate: 1.0%


DCF Intrinsic Value Model 2011 2012 2013 2014 2015 DCF Intrinsic Value Model 2016E 2017E 2018E 2019E 2020E

PV of Future FCFs 90,684 100,463 104,022 108,935 121,150 PV of Future FCFs 122,732 124,800 126,735 128,402 129,686

+ Cash and ST Investments 2,428 9,350 11,130 14,254 19,490 + Cash and ST Investments 17,624 18,065 18,517 18,887 19,076

= Total Intrinsic Firm Value 93,112 109,813 115,152 123,189 140,640 = Total Intrinsic Firm Value 140,357 142,865 145,251 147,289 148,762

− Total Debt 9,580 8,189 9,732 10,524 35,002 − Total Debt 23,499 24,087 24,689 25,183 25,434

= Intrinsic Value of Equity 83,532 101,624 105,420 112,665 105,638 = Intrinsic Value of Equity 116,857 118,778 120,562 122,107 123,328

÷ Total Common Shares 1,077 1,054 1,019 1,002 1,096 ÷ Total Common Shares 1,090 1,085 1,074 1,063 1,047

= Per Share Intrinsic Value $77.53 $96.43 $103.42 $112.43 $96.43 = Per Share Intrinsic Value $107.21 $109.52 $112.28 $114.87 $117.79

vs. Year‐End Stock Price $41.75 $37.69 $46.36 $58.21 $77.61 vs. Most Recent Stock Price $73.40

Over (Under) Valuation/Share ($35.78) ($58.74) ($57.06) ($54.22) ($18.82) Over (Under) Valuation/Share ($33.81)

% Over (Under) Valued ‐46.2% ‐60.9% ‐55.2% ‐48.2% ‐19.5% % Over (Under) Valued ‐31.5%


Dividend Discount Valuation Model


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EVA MVA (right axis)

Analyst Comments: ROIC: The forecasted ROIC greater than WACC illustrates that Medtronic is still able to create value, and the forecasted ROIC is increasing over time signaling an improvement in their ability to generate profit on investments.EVA/Share: EVA per share is increasing from 2016 to 2020 based on the forecast. EVA future upward trend is showing that the cost of capital had increased less than the NOPAT the firm generates.Intrinsic Value: Intrinsic value over the forecasted period appears to be under valued from 2011 to 2020. The risk free rate has been adjusted to 1.76% of the 10 year treasury yield. MVA/Share: MVA per share increases in 2016 expressing a increase in the value of capital contributions to the firm by shareholders. Genuine value creation increases in the forecasted model from $40.04 in 2016 to $80.19 in 2020.Conclusion: Medtronic MVA per share increase expresses how genuine value creation increases from 2016 to 2020. Even with Total Invested Capital growing at a slower rate, ROIC shows a stable trend and increase in 2020

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NOPAT per Share Free Cash Flow per Share

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EVA per Share MVA per Share (right axis)



Relative Valuation 2011 2012 2013 2014 2015 Relative Valuation 2016E 2017E 2018E 2019E 2020E

Price to Earnings 14.5 11.0 13.6 19.0 31.8 Price to Earnings 15.9 23.7 24.1 24.7 25.5

Price to Free Cash Flow N/A ‐9.6 17.4 36.9 ‐15.7 Price to Free Cash Flow 13.4 21.2 20.6 19.6 18.3

Price to Sales 2.9 2.5 2.9 3.5 4.2 Price to Sales 2.9 4.1 4.1 4.1 4.1

Price to Book 1.5 1.2 1.4 1.5 0.8 Price to Book 0.7 1.1 1.1 1.1 1.1

Earnings Yield 6.9% 9.1% 7.3% 5.3% 3.1% Earnings Yield 6.3% 4.2% 4.1% 4.1% 3.9%

Dividend Yield 2.2% 2.6% 2.2% 1.9% 1.6% Dividend Yield 1.8% 1.3% 1.3% 1.4% 1.4%


Analyst Comments:P/E ratio: Medtronic's 2016 P/E ratio within the reasonable range, and goes well above the reasonable range of 12 to 18 in 2017 through 2020. Medtronic's P/E ratio above the reasonable range is supported by Medtronic's fast future growth and high ROIC and WACC spread.

Dividend yield: Medtronic's dividend yield increases in 2016 (still below 2%) and starts declining from 2017 to 2020 and remais below the 2% preference for strong dividend payers.

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ROIC WACC

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Price to Sales Price to Book (right axis)


MDT Medtronic plc Sector: Healthcare HOLD · MDT Medtronic plc Sector: Healthcare HOLD ......

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