Company Overview

Medtronic, Inc. develops, manufactures, and sells device-based medical therapies worldwide. Its Cardiac Rhythm Disease Management segment offers cardiac pacemakers, implantable defibrillators, cardiac resynchronization therapy devices, atrial fibrillation products, leads, ablation products, electrophysiology catheters, information systems, diagnostics and monitoring products, and patient management tools. The company’s Spinal segment offers thoracolumbar, cervical, and interbody spinal devices; bone growth substitutes; and devices for vertebral compression fractures and spinal stenosis. Its CardioVascular segment offers coronary and peripheral stents and related delivery systems, endovascular stent graft systems, distal embolic protection systems, perfusion systems, positioning and stabilization systems, products for the repair and replacement of heart valves, and surgical ablation products, as well as balloon angioplasty catheters, guide catheters, guidewires, diagnostic catheters, and accessories.

Prognosis

The stock has dropped over 30% since it highs earlier in the year with recent downside momentum triggered by declines in key businesses that were worse than modest expectations during its last earnings report. It is now in bargain territory.

Valuation

MDT is selling for approximately 9.5 times this year’s consensus earnings and 8.5 times next year’s projected earnings. It is selling at roughly 9 times operating cash flow. It also sports a decent 2.8% dividend yield. Its valuation is at a five year low measured by P/E, P/S, P/CF or P/B.

Catalysts

There are several factors that we believe should provide support for a higher stock price in the near and medium term:

1. It is rolling out several new products in the spinal and cardiac rhythm management arenas
2. Margins should improve as cost optimization efforts continue to bear fruit
3. Recently acquired emerging technology to treat atrial fibrillation and transcatheter heart valves should provide new growth prospects
4. Company should continue to experience strong growth in emerging markets

Recommendation(s)

Given its solid revenue streams, decent dividend yield, strong cash flow and low valuation; we feel stock is currently undervalued. In our opinion, the stock should be trading at a more reasonable rate of approximately 13-14 times this year’s projected earnings of around $3.40. This is at the very low end of its historical valuation. Our target Price is $44-$48, up from the current price of $32.28.

Bret Jensen is the Chief Investment Strategist (CIS) for S.A.M. (Simplified Asset Management), a long/short hedge fund based in Miami, Florida. S.A.M. was in top five percent of long/short hedge funds for total return in its first full year (2009) ranked by the Hedgeco fund database (over 450 funds in category). Responsible for portfolio management and investment selection decisions, Mr. Jensen has nearly 20 years of experience in the financial services industry, including more than a decade of managerial experience at American Express. Mr. Jensen has a Bachelor of Science degree in Finance from Arizona State University. Read more of his insights on his personal blog at BretJensenInvests.com.