Like all of our Most Attractive Stocks the company has (1) high and rising economic profits (as distinct from accounting profits**) and (2) a cheap valuation. As shown in our report on MDT, the company’s ROIC is in the Top Quintile of all the companies we cover and its economic earnings are growing. At the same time, the stock’s valuation implies that MDT’s profits will decline by 50% and never grow again. In other words, the stock market is predicting a permanent decline of 50% in MDT’s profits. I’d say those are some low expectations.
HIDDEN GEM: Our discounted cash flow analysis shows that MDT’s current valuation (stock price of $31.95) implies that the company’s profits will decline by 50% and never grow again. Our economic earnings models shows profits are growing, not declining, which makes the Risk/Reward for MDT Very Attractive.
For details on what causes the difference between Economic Versus Accounting Profits, see Appendix 3 on page 10 of our report on MDT. See Appendix 4 to learn how MDT increased NOPAT by cutting costs and increased its NOPAT Margin from 24.5% to 25.6%. See Appendix 5 for details on how MDT grew Invested Capital slower than revenue and drove Invested Capital Turns higher. Appendix 7 (in the Return on Invested Capital section) shows how the improved NOPAT Margin and rising Invested Capital Turns result in an increase in ROIC (to 14.5% from 13.4%) and Economic Profit, which rose by $345mm.