FAST Graphs At-A-Glance

Articles which show the principles for reading and analyzing FAST Graphs At-A-Glance.

Medtronic-A Lesson On Reasonableness Despite New Highs

FAST Graphs - Thursday, June 05, 2014
  • People tend to lump all companies together as “stocks” and today the general characterization is that stocks are “expensive.”
  • While it is true that Medtronic is at an all-time high price, this certainly doesn’t translate to an all-time high valuation.
  • As such, many might be inadvertently passing over perfectly investable opportunities.

Everyone is keenly aware the current market situation, right? The broader indices are at all-time highs and thus prices should fall, and partnership decisions made today ought to come with a “caution: danger ahead” label.  Perhaps, but we would like to remind the reader that it is not a stock market so much as it is a market of stocks. As a fundamental example of this, we thought it might be interesting to look at the past relationship of share price and earnings for medical device maker Medtronic (MDT).

Founded in 1949 by brothers-in-law Earl Bakken and Palmer Hermundslie, Medtronic set out to use their scientific knowledge and entrepreneurial skills to help others. Their first product – a wearable, battery-powered cardiac pacemaker - provided the foundation for the company.  Today, as described by the company itself, Medtronic has become the world’s largest medical technology company, offering an unprecedented breath and depth of innovative therapies – fulfilling their mission to alleviate pain, restore health and extend life. Last year the company did business in over 140 countries while more than 9 million people benefited from their therapies. 

While this provides a bit of insight into how and why the company operates, it doesn’t necessarily give much detail as to the firm’s long-term profitability. Unfortunately, if you were to take a look at most financial websites, you wouldn’t find this information there either. For instance, the below price only graph is what you would likely come across.

Here we just see a wiggly black line that doesn’t give you any hint as to the prospects of the business. You can see that today the black line is a bit higher than it has been in the past and might conclude that it is indeed a bad time to buy.

Regrettably, this is how a great deal of people think about owning a stock – what has the price done lately?  In our view, this is the precise wrong way to look into a partnership decision. Obviously price is important, but it means nothing without simultaneously viewing the business. Unlike a grocery store, $63 doesn’t mean anything in the market of stocks. It could be $6.30, $630 or $63,000 and provide you with the same ownership proposition. Medtronic might be at a “higher” price, but that’s not the important part – valuation is the key. The relationship between price and business performance is what allows for an intelligent study.

In order to find the business results, you might look to the company’s financials. To short-cut this a bit, let’s look at a 15-year graph of Medtronic using F.A.S.T. Graphs™.   

Here we find that while the price of Medtronic has been wiggly and unpredictable, the business results have been astoundingly consistent. More specifically, operating earnings have grown every year – even during the most recent recession – and the dividend has followed suit. In fact, Medtronic has not only paid but also increased its dividend for 36 consecutive years.

If we take these two graphs collectively, even greater insight can be had. At the turn of the century and in the years to follow, investors routinely traded shares of Medtronic at 30 or 40 times earnings – regularly leading to negative or barely positive results. Yet the business wasn’t the problem – it was growing at an average rate of 16% per year. Instead, the valuation was the issue.

More recently the exact opposite can be observed. Instead of a continuous premium, investors ordinarily exchanged shares at prices below 15 times earnings – eventually leading to performance results that outpaced growth for the buyers. Today shares trade at about 16 times earnings. But here’s the takeaway: if you were to look at the first graph you would come to the conclusion that shares of Medtronic are trading at a bit higher of a price than they were in the past decade. Yet what that “analysis” doesn’t consider is the idea of improved earnings.

In 2001, Medtronic traded in the $50 range with underlying earnings of about $1.20. Today Medtronic trades around $63 with expected earnings over $4. So it is true that Medtronic shares are trading at a higher price – an all-time high in fact. What’s missed in the price only view is the idea that valuation is what matters – obviously you should be willing to pay more for $4 of earnings rather than $1 or $2.  In fact, these 52-week and all-time highs aren’t so much notable events as they are common and required occurrences.  

Moving forward this information can be insightful. Instead of seeing that Medtronic is trading at an all-time high and moving on, you can rationally evaluate a partnership decision based upon its valuation prospects moving forward.

For instance, we have included the Estimated Earnings and Return Calculator for Medtronic below. It uses the consensus estimates among analysts for earnings and dividends and assumes an ending P/E ratio of 15. Here we see a total annual estimated return that is roughly in line with the estimated earnings growth rate.

Of course this expected return might not necessarily “knock your socks off” but it does provide a solid baseline of thought. Instead of thinking: “Medtronic is at a new high, I’ll pass.” You can logically consider: “Medtronic has been a great company with an exceptional dividend record. At the current valuation I might expect long-term performance results to roughly track business results over time.” In turn, this type of ideology can help you with your other investment decisions as well. The point is to consider valuation rather than automatically precluding yourself from a rational view of the company due to price only. 

Now, none of this is to suggest that Medtronic is the best or surest investment today. All investments carry risk, and it’s entirely possible that the share price, business, or both, decline mightily tomorrow. The takeaway is that a new high price doesn’t automatically translate to a new high valuation. As always, we recommend for both this company and others, that the reader conduct his or her own thorough and logically reasoned analysis. (And “this stock just hit a new high price” doesn’t count.)

Disclosure:  Long MDT at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.


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"Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


"Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


“Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


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“I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


“I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


“Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


“Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


“Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


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    Testimonials


    “I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


    “When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

    (Wish I could be) Long FAST Graphs!!!”


    “One more vote for the value of FAST Graphs™; just started a subscription to Chuck's great service (premium), and am having a ball analyzing so many stocks quickly.”


    “I feel very ill-equipped to make investment decisions without Fast Graphs. :-)”


    “Yesterday, I signed up for your F.A.S.T. Graphs™. It's a really amazing, valuable tool for checking over/undervaluation of stocks. Wish I had it years and years ago!!”


    “Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


    “About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


    "Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


    “If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


    “I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


    "Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


    "Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


    “Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


    “I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


    “I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


    “I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


    “Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


    “Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


    “Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


    ”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


    “Chuck's F.A.S.T. Graphs™ will give you a tool to find those well chosen stocks...”


    “Thanks for the F.A.S.T. Graphs™, Chuck. They are the best tool I've used.”