Financial analysis of Medtronic Inc - Research Paper Example

?Medtronic Inc Introduction Nowadays, there have many companies come into competition for serving the medical needs of the growing population. These companies have great pressure to serve the best possible quality products as the customers are mainly patients and ill people. In medical technology, Medtronic is considered as global leader. It is redefining the way medical technology responds to chronic ailment and diseases. The number of offerings of Medtronic includes range of therapeutic part, like diabetes, vascular and heart disease, spinal condition and neurological disorder. Along with these numbers of offerings they have, they possess years of experience which allows them to transform the lives of millions of patient every year globally. Medtronic offers range of products for therapies and medical devices. The company operates its business in more than 120 countries. Its head quarter is situated in Minnesota and has employed around 40,000 people. The overall strategic position and infrastructure of Medtronic Inc is very competent and there is hardly any loophole in its formulated strategies and design. Responsibility in Marketplace For every industry and every firm, marketplace responsibility is essential to maintain. The responsibility and accountability which medical sector holds is far more challenging than any other sector. A single incident of mistake from medicinal institution can rupture the reputation of the company. The case of Medtronic in regards to accountability and responsibility is much stronger as it has hardly encountered any severe case which would have violated the ethical standards. Medtronic Inc not only possesses leadership skills but also possess a strong marketplace in behaving with accountability and responsibility. This role of responsibility and accountability in marketplace reflects the integral role of suppliers and customers for the long term sustainability of Medtronic. Global Quality Strategy Global quality strategy refers to maintaining the level of quality which is supplied at the global level. Some companies outperform others by providing the best possible quality to their patients. This is the greatest strength which a medical firm can possess because it retains the existing number of customers. Being positive and trustworthy in the eyes of customer is very important in the field of medicine. The vision of Medtronic Inc is to sustain the quality of products, services, relationships and processes. In medical care, maintaining the quality of these concerns is integral. It is not only important for physicians but also for patients, hospital administrators and Medtronic’s performance and corporate reputation. The company has utilized systematic approach for maintaining quality which can be divided into risk management, centralized monitoring for quality processes and standards and resources for maintaining quality concerns globally. The company has expertise in maintain the quality of products which it offers including not medicines but therapies, equipments as well. This can be the major reason that in the subsequent mentioned SWOT analysis, the company has the lowest number of weaknesses which is a sign of a sustainable and peak performing firm. SWOT Analysis of Medtronic Inc SWOT analysis analyzes the strengths, weaknesses, threats and opportunities which a firm faces while operating its business. Strengths and weaknesses are normally referred to as related to the internal environment of business, whereas threats and opportunities are generally regarded as related to the external environment of the business. Strengths Strengths of a company determines its strong points which assists that company in carrying out it operations. Medtronic Inc possesses a strong market position. It is considered as the global market leader in medicinal industry. Another strength of this company is that the company offers wide range of products for almost every type of medicinal field. Medtronic Inc’s financial stability is its major strength. The company has great control over costs which results in a higher level of net profit. Weaknesses A company which has lowered number of weakness is a sign of firm which is performing in more than satisfactorily manner. The weakness of Medtronic is that some of the products of the company tarnish the brand image. The company has around 40,000 employees operating globally which is generating higher costs. In order to overcome this, the number of employees must be reduced. Opportunities Opportunities are always required in order to grow and expand. Without the existence of opportunities, the firm cannot get any chance of expanding or growing in future. For the past several years, the company has continuously been involved in strategic acquisitions which boost the potential of its growth. Almost every now and then the company keeps on offering new products and gets approval for launching those products. The growing number of cases of cardiovascular diseases is providing new opportunities to Medtronic Inc to meet those demands by introducing new therapies, equipments and medicines for this purpose. Threats The challenges which a company faces from its external environment are regarded as threats. Threats mainly incorporate the challenges coming from the side of competitors, customers, suppliers, economic, political, technological, social or financial environment of the company. Threats are those factors which can the company faces from its external environment. Threats which are encountered by Medtronic Inc include intense competition due to industry consolidation. Another fact which can be reason of threat for Medtronic Inc is that reimbursement level is decreasing which affects the growth and revenue of the company. If the company doesn’t overcome these threats then there are chances for other competitors to snatch the market share of Medtronic Inc. The SWOT analysis gives the overall picture of the position of the company in its respective industry. The SWOT analysis of Medtronic is quiet satisfactory because the greatest advantage or edge it has is the lowered number of weaknesses. There are almost negligible weaknesses which Medtronic Inc possesses in contrast to that, it has several strengths and opportunities which is a sign of well performing firm. The company also has lowered number of threats but those threats can be very significant if taken lightly. In order to getter a better position, Medtronic Inc needs to overcome and get control over its threats. DuPont Analysis Description Formula 2010 2011 Growth Net Sales 15,817 15,933 0.73% Net Earnings 3,099 3,096 -0.10% Total Assets 28,090 30,424 8.31% Total Equity 14,629 15,968 9.15% Earnings Per Share 3.22 3.36 4.35% Dividend Per Share 0.82 0.9 9.76%     Net Profit Margin Net Earnings 19.59% 19.43% -0.82%   Net Sales       Total Asset Turnover Total Sales 0.56 0.52 -6.99%   Total Assets       Equity Multiplier Total Assets 1.92 1.91 -0.77%   Total Equity       Return on Equity   21.18% 19.39% -8.47% The above table shows the DuPont analysis of Medtronic Inc. The DuPont analysis basically demonstrates return on equity. Normally the formula for calculating return on equity is quite simpler and takes into account only the net earnings in its numerator and total equity in its denominator. But in DuPont analysis, the formula is split into three other formulas and by multiplying all the three formulae with each other, the same result is obtained. The current formula for return on equity is comprised of three formulae including net profit margin, total assets turnover and equity multiplier. Net profit margin of the company remained a bit stable and there is hardly a negative change of -0.82% in year 2011 as compared to year 2010. Total asset turnover and equity multiplier were also on a negative side resulting in -6.99% and -0.77% respectively as compared to previous years. Similar trends were also observed in return on equity which experienced a decline of around -8.47% from the last year. Sales and Profitability Analysis The above table also represents the sales and earnings performance of the company. The company barely remained consistent with its last year results of sales and just managed to increase the sales percentage by 0.73%. However, the net earnings of the company slipped a bit and presented a negative growth of -0.10%. On the other way, the company remained quite successful in developing a firm balance sheet where the company performed substantially well and increased its asset and equity base to 8.31% and 9.15% respectively. Per share performance of the company remained quite satisfactory as well, as the company experienced a growth of 4.35% in earning per share. For investors, the company paid exceptionally remarkable dividends with the growth of 9.76% on year on year basis in the last two fiscal years of the company. Debt Analysis Maturity Book Value Price Market Value Weights Yield 2013 2,200 1.0102 2,222.44 0.2515 0.715% 2014 550 1.07955 593.75 0.0672 0.605% 2015 1,250 1.06907 1,336.34 0.1512 0.702% 2016 600 1.13114 678.68 0.0768 0.979% 2016 500 1.05125 525.63 0.0595 1.321% 2019 400 1.20874 483.50 0.0547 2.370% 2020 1,250 1.1471 1,433.88 0.1623 2.425% 2021 500 1.10602 553.01 0.0626 2.790% 2039 300 1.32824 398.47 0.0451 4.410% 2040 500 1.22108 610.54 0.0691 4.201%   8,050   8,836.23 1.0000 1.667% Medtronic Inc. has issued around ten types of bonds with different maturities and coupon rates. The book value of the debts of the company is around $8,050 million. The overall prices of the bonds of the company are more than par values showing a healthy and sound financial position of the company. The overall market value of the company is computed to be of around $8,836.23 million. The overall weighted average yield of the bonds of the company is computed as 1.667%. The book values of the company are obtained from the financial statements of Medtronic Inc. However, the current prices of the bonds and current yields of the company are obtained from FINRA. Equity Analysis Items Amounts Current Share Price 38.12 No. of Shares Outstanding 1,097,342,586 Rf 0.05% S&P 500 – Op. (24th Feb, 11) 1307.34 S&P 500 – Cl. (24th Feb, 12) 1365.74 Market Return 4.47% Risk Premium 4.42% Beta 0.95 Cost of Equity 4.25% MV of Equity 41,830,699,378 The current share price of the Medtronic Inc. on 24th October, 2012 was closed at $38.12. The number of shares outstanding of the company is around 1.09 billion. The risk-free rate taken for the purpose of finding out required rate of return from Capital Asset Pricing Model (CAPM) is assumed to be the rate 3-month treasury bills, which is 0.05%. In order to calculate the market return, Standard & Poor 500 return is considered for this purpose and the above mentioned closing values of the index are taken into account. The overall market return for the whole year is computed as 4.47%. The beta of the company is obtained from Yahoo! Finance and its value is 0.95. By applying the formula of CAPM, the required rate of return for the Medtronic Inc. is computed as 4.25%. By multiplying the number of shares outstanding with the current share price of the company presented the market capitalization of the company which is also called as market value of the equity amounting to around $41 billion as of 24th October, 2012. Capital Asset Pricing Model is mainly used by the investor in order to compute the required rate of return from a particular stock of the company. The required rate of return is a linear function as per the assumptions of CAPM. The formula for the computation of the required rate of return is presented as follows. ROR = Rf + Risk Premium x Beta The above formula states that required rate of return of a particular stock is dependent upon the risk premium mainly. Beta is the coefficient of this equation and the risk-free rate is the y-intercept of the equation. This formula can be interpreted such that for a particular stock, an investor demands at least a risk-free rate from that stock along with the market return in such a manner that the risk exposure of that stock in the form of Beta is to be incorporated in the equation. Risk premium, however, is computed as the difference between the risk-free return and the market return. For the purpose of the Medtronic Inc. the required rate of return demanded by investor is computed as 4.25%. The calculation takes into account the risk-free return of 0.05% as the minimum return demanded by investors, which is also called as the y-intercept. Beta shows the riskiness of the stock with the market behaviour which is taken 0.95. By putting all the figures into the above equation, a required rate of return of 4.25% is computed for Medtronic Inc’s stock. Capital Structure – WACC Items Capital Structure Weights Rates Debt 8,836.23 0.17 1.09% Equity 41,830.70 0.83 4.25% Total 50,666.93 1.00   WACC     3.70% Weighted Average Cost of Capital is computed by the companies in order to find out as to actually how much is the cost of raising capital from both debt and equity resources. When companies raise funds through equity, they normally have to bear the cost of dividends but it is not obligatory for the companies. However, the investors also demand return in the form capital gains as well. Therefore, cost of equity comprised on both the dividends and capital gains. Due to the limitations of CAPM, the dividends are ignored for the purpose of computing the cost of equity. Similarly, the companies also raise funds by issuing debt securities. On those debt securities, the companies have to pay the cost in the form of interest. Weighted average method of computing the market yield and market value of debt of the company is used for valuing debt securities on current market data. The conventional way of computing the overall cost of capital including both the equity and debt, the companies use market values of these data. However, there market yield of the debt is taken as an after-tax figure due to the fact that interest payments are tax deductable. The cost of equity and the cost of debt with their relative proportion in the capital structure of the company are then taken into the formula of Weighted Average Cost of Capital. The weights are assigned in this formula on the basis of capital structure of the company such the market value of debt and market value of equity are accounted for this purpose. The above table summarizes the computation for the cost of capital of the company such that the capital structure comprised of just 17% of the debt capital and the rest of 83% is allotted for equity capital. Overall, the company’s risk exposure seems quite healthy as the company’s leverage position is quite satisfactory. The after-tax cost of debt of the company is computed as 1.09% assuming that the company pays taxes at 35% on its net earnings. The cost of equity is taken from the CAPM computation and the required rate of return of 4.25% is takes cost of equity of the company. By working on these values, the weighted average cost of capital is computed as 3.70% for Medtronic Inc. Dividend Analysis Items Amounts Actual Dividend – 2009 0.75 Actual Dividend – 2010 0.82 Actual Dividend – 2011 0.9 Actual Dividend – 2012 0.97 Forecasted Dividend – 2013 1.06 Constant Growth Rate 8.95% Price - The above mentioned table demonstrates the past dividend pattern of the Medtronic Inc. The company performed remarkably well such that the company maintained a healthy growth rate of 8.95% over the past four years. This shows that how well the company is heading towards improvement in generating free cash flows. Dividend pay out ratio of the company is also quite suitable and the company is distributing around 30% of its earnings in the form of dividends and also retaining 70% of its earnings for future growth opportunities. The dividend discount model was intended to use in order to find out the estimated share price of the company. However, the dividend growth rate of the company is well ahead of the required rate of return. The dividend growth rate of the company is computed as 8.95% whereas the required rate of return of the company is 4.25%. By putting all those figures in the formula of dividend growth model, the end value was computed as negative value. However, the share price of the company can never be in negative values. This is one of the major limitations of the dividend growth model such that this model gets failed when the constant growth rate exceeds the required rate of return of the company. References Dividend Discount Mode. (n.d). Retrieved from http://pages.stern.nyu.edu/~adamodar/pdfiles/valn2ed/ch13.pdf Kennon, Joshua. (n.d). Return on Equity - The DuPont Model. Retrieved from http://beginnersinvest.about.com/od/financialratio/a/aa040505.htm Medtronic Inc, SWOT Analysis. (n.d). Retrieved from http://www.yousigma.com/comparativeanalysis/medtronicinc.html Medtronic Inc. Common Stock (MDT). (n.d). Retrieved from http://finance.yahoo.com/q?s=MDT&ql=1 The Stable Growth DDM: Gordon Growth Model. (n.d). Retrieved From http://people.stern.nyu.edu/adamodar/pdfiles/ddm.pdf WACC- Weighted Average Cost Of Capital. (n.d). Retrieved from http://www.valuebasedmanagement.net/methods_wacc.html Read More