Medtronic has quietly been one of the large-cap winners in 2013, up more than 40% year-to-date. Perhaps more impressive has been the steady fashion in which the stock has risen, stair-stepping higher with no major corrections:
Medtronic is now almost a $60 billion market cap company, one of the largest medical device companies in the world. It gets about 45% of its revenues from outside the U.S., and has been a major player in the U.S. market for more than a decade.
The stock’s high this month is $58.85, quite close to its all-time high set back in December 2000, at $62. The monthly chart shows how the stock has been rejected in the 57-62 area on several occasions since 2000:
The stock’s rally has stalled once again in that region in the past month. In the ensuing 13 years since the 2000 high though, Medtronic’s underlying business has changed drastically. The company is expected to have sales of almost $17 billion, more than double its revenues in 2000. Its earnings growth has stagnated over the past 5 years (only 5-10%), but it is expected to earn more than 4x per share than what it earned in 2000.
Back in 2000, this was a high-flying, 70x P/E stock, with investors focused on what looked like an appealing future growth environment. Today, it’s a 15x P/E value stock, with investors focused on stability. Here is how the stock has grown into its P/E, 13 years later – 12 month trailing P/E:
The stock price is essentially the same, but the P/E is down from around 70 to around 15 today. The stock’s appreciation in 2013 has been primarily due to multiple expansion, since earnings growth is still only expected to be 5-10% in the coming years.
For now, resistance in the 57-62 area looks stout, and my bet would be that the stock at least stalls here for some time, if it doesn’t move lower. Yet, at 15x with 5-10% expected earnings growth, MDT could easily see more multiple expansion over the next year based on relative valuations of other large-cap, slow growth peers.