Medtronic, Inc. (MDT), Boston Scientific Corporation (BSX): Is This the Market’s Last Remaining Bargain?

Predictable business

Unlike Oracle Corporation (NYSE:ORCL) and Cisco Systems, Inc. (NASDAQ:CSCO), which are great companies that must undergo constant change to remain on top, Medtronic’s business and market share will look substantially the same in ten years as they do today. Breakthrough devices are rare in this industry; research and development is geared toward improving existing devices and methods rather than inventing entirely new ones. As a result, Medtronic’s scale advantage should enable it to maintain a sizable lead on would-be competitors.

Trading at a discount

Medtronic sells for 16.5 times earnings, while St. Jude sells for 24 times earnings (the unprofitable Boston Scientific sells for a slightly lower multiple of sales after backing out net cash). Both companies have similar records of reliability, excluding Medtronic’s one major recall, and should trade closer together.

But, more importantly, Medtronic trades at an absolute discount to fair value. If you divide last year’s free cash flow by its current market capitalization, you get a free cash flow yield of nearly 8%.

If Medtronic can simply continue to generate its current level of free cash flow, investors will earn a higher return than the market over the next five years. If Medtronic can grow its free cash flow, investors will receive a double-digit annual return over a long holding period. Both are great results for long-term investors.

The article Is This the Market’s Last Remaining Bargain? originally appeared on Fool.com.

Ted Cooper has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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