Medtronic is one of the rare companies that has grown earnings in each of the past 10 years (it has grown sales in 9 of the past 10 years – was down 0.1% in 2012). That impressive track record has not resulted in much appreciation in the stock, which is almost flat over that entire period.
We touched on MDT’s rare situation in a CotD post in November. The entire post is worth a read, laying out how MDT has grown into its valuation over the last decade, but the stock’s valuation from 10-15 years ago was too elevated for investors to garner gains from the company’s growth.
In any case, this was my conclusion:
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.
The stock was trading around $58 when I wrote the post 3 months ago, and it is trading around $58 once again today. The stock did make a brief run up above $60 in early January (the all-time high of $62 from 2000 is still in tact), but that move haws quickly rejected:
I’ve drawn the red line at the all-time high of $62 from 2000. The green line of support is around $54. MDT breached its 150 day ma for the first time in more than a year on the most recent selloff, but quickly recovered.
MDT reported earnings last week, and matched analyst estimates on the adjusted EPS. The company narrowed its earnings forecast for fiscal 2014 to $3.81 to $3.83 per share, from a prior forecast of $3.80 to $3.85. Only the fiscal 4th quarter report remains, but that tight guidance is a good illustration of a relatively consistent business model. Management rarely expects a surprise that could affect earnings by more than a penny or two per share.
As a result, the main movement in MDT’s stock is due to changes in the market’s perceived valuation of those consistent earnings – in other words, the P/E multiple. For now, the multiple looks relatively fair, which is why we expect continued rangebound price action between $54 and $62.
Implied volatility is also relatively low, which makes premium selling unattractive, despite the aforementioned range:
Put it all together, and I don’t see a trade to do here. But I wanted to lay out my thoughts in case MDT makes a run back down to the 54-55 area, where I think a long-biased trade might make sense with the right options structure.