State University with a bachelor’s of science in Finance with the highest honors.9 Compensation Information: Not Disclosed of Directors Board Member Insider/Outsider Omar Ishrak, Chairman and CEO of Medtronic, Inc. Insider Richard H. Anderson, CEO of Air Lines Outsider C. Donnelly, President and CEO of Textron, Inc. Outsider Victor J. Dzau, President and CEO of Duke University Health System Outsider Shirley Ann Jackson, President of Rensselaer Polytechnic Institute Outsider Governor Michael O. Leavitt, Chairman of Leavitt Partners Outsider James T. Lenehan, Retired President of Johnson & Johnson Outsider Denise M. O’Leary, Private Venture Capital Investor Outsider Kendall J. Powell, CEO of General Mills Outsider Robert C. Pozen, MFS Investment Management Outsider Preetha Reddy, Managing Director of Apollo Hospitals Outsider Medtronic’s of directors consists of 10 outsiders and 1 insider. The insider being, Omar Ishrak. All outsiders are successful and influential members in the business community, their diverse perspectives work together to create the best results for Medtronic shareholders. Medtronic uses many different committees such as the finance, audit, and compensation committees. The committees all abide by the NYSE’s standards for director independence (majority of directors on board must be independent), providing greater assurance that conflict of interest is not an issue and shareholders should be concerned about. Corporate Responsibility magazine ranked Medtronic as one of America’s best corporate citizens in 2012. The magazine ranks companies based on policies and actions relating to the environment, climate change, human rights, employee relations, philanthropy and financial and corporate governance. Source: Bloomberg1, NYSE42 Competitors Compensation Plans St. Jude Medical President and Chief Executive Officer : Daniel J. Starks 2012 2011 Salary $1,045,500 $1,025,000 Restricted Stock Award: $1,426,001 $0 Securities Options: $2,912,165 $4,481,808 Non-Equity Compensation: $1,301,648 $1,030,125 Compensation: $36,500 $36,350 Total Compensation: $6,721,814 $6,573,283
Massachusetts Financial 35,928,283 1.27 422,621 9/30/2013 Capital Group Companies 33,054,154 1.17 803,000 9/30/2013 Many of the same Medtronic institutional owners are the top owners of Johnson & Johnson as well. These include State Street Corp, Blackrock, Vanguard, and Northern Trust Corporation. Recent Johnson & Johnson Insider Trades Date Insider Shares Transaction 1-Nov-13 Peter Fasolo 3,873 Disposition 1-Nov-13 Peter Fasolo 8,620 Option Exercise 16-Oct-13 Leo Mullin 7,600 Option Exercise 16-Oct-13 Leo Mullin 4,557 Disposition 14-Aug-13 Stephen Cosgrove 3,942 Disposition 14-Aug-13 Stephen Cosgrove 25,000 Option Exercise 14-Aug-13 Stephen Cosgrove 17,200 Sale 5-Aug-13 Michael Ullmann 20,650 Option Exercise 5-Aug-13 Michael Ullmann 16,140 Sale 31-Jul-13 Michael Ullmann 21 Acquisition 31-Jul-13 Stephen Cosgrove 31 Acquisition 25-Jul-13 Paulu Stoffels 53,168 Option Exercise 25-Jul-13 Paulu Stoffels 45,440 Sale Source: Bloomberg1 Insider trading of JNJ is not indicative of how insiders are viewing the company, there is a mix of sales and purchases, all of varying sizes. Laboratories Top 10 Owners Holder Name Shares %Out Latest Change Date Reported Vanguard 94,961,848 6.14 1,825,769 9/30/2013 Blackrock, Inc. 94,841,558 6.13 (6,330,320) 9/30/2013 State Street Corp 68,954,608 4.46 1,187,838 11/14/2013 Bank of New York Mellon 30,027,498 1.94 366,008 9/30/2013 Massachusetts Financial 25,034,343 1.62 9,498,291 9/30/2013 Northern Trust Corporation 24,587,724 1.59 (989,350) 9/30/2013 Fargo & Company 18,932,294 1.22 2,289,178 9/30/2013 Jennison Associates 17,773,367 1.15 (1,177,618) 9/30/2013
Interest Rate Swap Terminations In July 2011, Medtronic terminated interest rate swap contracts associated with the company’s $2.2 billion, 1.625% 2013 convertible note and $550 million, 4.5% 2009 note due in 2014. At the time of the termination, the swap contracts were classified as assets and resulted in a $46 million cash receipt including $10 million in accrued interest, reducing the 2011 interest expense. In August 2011, the company terminated an interest rate swap agreement related to the $1.23 billion, 3% 2010 note due in 2015. The contracts were classified as assets at the termination and resulted in a cash receipt of $42 million including $7 million in accrued interest, reducing the 2011 interest expense. Interest Rate Swap Terminations- Projected As of April 26, 2013, the market value of interest rate swap contracts is valued at an unrealized gain of $181 million40. Under the assumption that Medtronic continues to benefit from these agreements, MDT is able to realize the gain in upcoming years in the form of cash receipts and reduction of annual interest expense. Based on the projected one month LIBOR rates presented below, LIBOR remains at or below 2.5% over the next eight years. With Medtronic’s current interest rate swap contracts floating above LIBOR between 37 and 92 basis points, MDT continues to benefit from the swap agreements in the future and terminates them resulting in gains. Cost of Debt Estimated Cost of Long-Term Debt (2.45%) The cost of long-term debt is calculated based on book values of the bonds outstanding. A weight was assigned to each bond by dividing its respective book value by the total book value of bonds outstanding. The weight of each bond is then multiplied by the current yield, found using Excel’s “YIELD” function, producing a “weighted yield”. The weighted yields are then added resulting in a pre-tax cost of debt of 2.55%. Next, a debt adjustment factor of 1.24 is applied to the pre-tax cost of debt giving rise to an adjusted pre-tax cost of debt of 3.16%. The debt adjustment factor takes into account the credit rating of Medtronic based on Standard & Poor’s credit rating on long-term debt, which is A+. A credit rating of A+ has a corresponding value of five, which is then divided by 21 (the overall number of levels in the rating scale). Finally, one is
Price to Sales The price to sales ratio contains drawbacks as well as advantages. An advantage to using price to sales, is that sales is a difficult numbers to manipulate. This ratio can be useful when valuing companies with high fluctuations in sales, but it can be deceiving at times. The price to sales ratio fails to account for how well the firm is able to retain these revenues, through high profit margins as well as low operating expenses. Conversely, a firm could report a high volume of sales but low earnings as a result of poor cost management. The following table represents Medtronic’s price to sales in relation to comparable companies, and calculation for multiples analysis. Name (Ticker) Price to Sales Industry Average 4.11 Sector Average 5.47 Medtronic (MDT) 3.56 Abbott Laboratories (ABT) 2.73 CR Bard Inc (BCR) 3.7 Baxter International (BAX) 2.55 Becton Dickinson and Co (BDX) 2.64 Boston Scientific (BSX) 2.25 St. Jude Medical Inc. (STJ) 3.07 Stryker Corporation (SYK) 3.16 Edwards Lifesciences (EW) 3.64 Zimmer Holdings Inc. (ZMH) 3.38 Carefusion Corp. (CFN) 2.42 Average of Comparables 2.95 Standard Deviation 0.49 Median 2.9 Medtronic’s price to sales ratio is higher than all but one of its competitors, Edwards Lifesciences. Medtronic outperforms all competitors besides Abbott when it comes to total revenues. However, its price to sales ratio indicates that the market is overvaluing these sales. This overvaluation can be attributed to the fact that Medtronic is able to retain more money from its sales due to higher margins than competitors. In effect, this leaves more cash to distribute back to equity holders. Investors are willing to pay more for Medtronic’s revenues compared to competitors because they receive more benefit per dollar of sales in the long run. Medtronic’s price to sales ratio is 3.56, while competitors are averaging 2.95. Based on these ratios, MDT is overvalued by$9.88 or 17%. Price/Sales MDT Closing Price (11/09/2013) $58.03 MDT Price/Sales 3.56 Sales 16.301
Date Firm Type Rating Target Price Start $ End $ % Chg. (Past) (Past) 10/23/2013 Upgrade Buy 66 56.73 58.55 3.21% (Hold) -56 5/31/2013 New Coverage Neutral 52 52 58.55 12.60% (N/A) (N/A) 5/16/2013 Downgrade Neutral N/A 50.01 58.55 17.08% (Outperform) (N/A) 2/14/2013 Downgrade Neutral N/A 46.99 58.55 24.60% (Buy) (N/A) 1/25/2013 Downgrade Hold 46 46.45 58.55 26.05% (Buy) -46 1/3/2013 Upgrade Buy N/A 41.88 58.55 39.80% (Neutral) (N/A) 11/20/2012 New Coverage Hold N/A 41.81 58.55 40.04% (N/A) (N/A) Of the 17 analysits represented in the chart above, the mean conscensus is Medtronic is undervalued and is a prime investment opportunity. Motley Fool analyst , Ted Cooper, calls Medtronic “the last remaining bargain” and explains “[Medtronic] sells at a deep discount to its peers due to a high degree of uncertainty regarding its future cash flows. But a closer look at the company’s diversified product portfolio and future opportunites makes the stock look attractive at current levels53.” The mean analyst target price shows Medtroinc undervalued by $2.62 or 4.5%.