Has Medtronic Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Medtronic (NYSE: MDT  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Medtronic.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

5.3%

Fail

 

1-year revenue growth > 12%

2%

Fail

Margins

Gross margin > 35%

75.7%

Pass

 

Net margin > 15%

21.1%

Pass

Balance sheet

Debt to equity < 50%

67.2%

Fail

 

Current ratio > 1.3

1.43

Pass

Opportunities

Return on equity > 15%

19.1%

Pass

Valuation

Normalized P/E < 20

17.20

Pass

Dividends

Current yield > 2%

2.3%

Pass

 

5-year dividend growth > 10%

16.4%

Pass

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Medtronic last year, the company hung onto its seven-point score for the third year in a row. The stock has also been quite consistent, posting gains of around 15% over the past year.

Medtronic is a giant in the medical-devices industry, with particular specialties in cardiac and cardiovascular devices like pacemakers, valves, and stents. With an aging population, that has been a high-growth industry, even as headwinds like the new excise tax on medical-device sales weighing on Medtronic's future prospects.

One area where Medtronic has focused its efforts is in China. With its September purchase of China Kanghui Holdings, Medtronic boosted its presence in the orthopedic implant market, fighting back against both Johnson & Johnson (NYSE: JNJ  ) and Zimmer Holdings (NYSE: ZMH  ) . J&J has been able to boost its international medical device business despite adverse currency impacts, with the Asia-Pacific region providing much of the gains, while Zimmer made its own Chinese acquisition in 2010 and now relies on Asia for nearly a fifth of its total revenue.

But one long-term risk involved in Medtronic's business is the threat of drug therapies proving to be more effective than medical devices. With so much of the heart business that Medtronic and rivals St. Jude Medical (NYSE: STJ  ) and Boston Scientific (NYSE: BSX  ) have built up generating billions in revenues, some doctors and other health-care players are asking whether patients really need their devices or whether other treatments are more effective. These issues aren't unique to Medtronic, but they affect it in particular because of its size.

For Medtronic to improve, it needs to keep taking advantage of demographic trends favoring increased demand and use its competitive advantages to beat back competitors. By reducing debt and lifting sales, Medtronic isn't too far away from reaching perfection sometime in the future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Medtronic is a giant in medical devices, but for a truly diversified health-care company, Johnson & Johnson leads the industry. But with numerous product recalls and other miscues, has J&J lost its status as a well-diversified giant that's perfect for your portfolio? Make sure you understand the full story behind the stock, along with its key opportunities and risks, by checking out our brand new premium report on Johnson & Johnson. To claim your copy simply click here now for instant access.

Click here to add Medtronic to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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