Medtronic’s operating margins
Medtronic (MDT) reported an operating margin of 30.7% of total sales in fiscal 4Q17 on a constant currency basis. The company’s adjusted operating margin improved by ~40 basis points compared to its fiscal 4Q16 operating margin. Excluding currency and acquisition impacts, the company saw an improvement of approximately 70 basis points on an organic basis. Net income in the quarter rose by around 5.3%, on a YoY (year-over-year) basis.
For the full year 2017, Medtronic saw an improvement of approximately 140 basis points on an organic basis, which was in-line with the company’s expectations. This takes into account the foreign currency impact, acquisitions during fiscal 2017, and adjustment for one extra week in fiscal 2016. Net profit came in at $4.03 billion, representing a ~13% rise.
The continued operational efficiencies and Covidien synergies mainly led the operating margin improvements. The successful execution of Covidien synergies delivered over $600 million in synergy savings as of fiscal 2017. The company expects to deliver $850 million of total savings by the end of fiscal 2018.
Fiscal 2018 performance expectations
Medtronic expects solid operating margin improvement in fiscal 2018. For 1H18, gross margin on a constant currency basis is expected to be flat or improve slightly due to the continued investment in sales and marketing expenses for key product launches that include Resolute Onyx, TAVR (transcatheter aortic valve replacement) intermediate risk, and the 670G. Thus, better margins are expected in 2H18.
Medtronic’s industry peers include Johnson & Johnson (JNJ), Edwards Lifesciences (EW), and Boston Scientific (BSX), which reported operating margins of 31.4%, 33.2%, and 16.9% of their total sales, respectively, in their last reported quarters.
To gain exposure to Medtronic, you can invest in the iShares US Medical Devices ETF (IHI), which has 11.1% of its total portfolio in Medtronic. IHI has returned 20.6%, while the S&P 500 Index (SPY) has returned 8.1% so far in 2017.
In the next part of this series, we’ll look at Medtronic’s capital allocation strategy in fiscal 2017.