Medtronic: Strong Quarter, Solid Value, but No 15% Return
Without MiniMed, Medtronic grows at double digits and earns 9.6% on capital. Fair value ~$110, but my 15% hurdle needs an entry below $89.
On 14 October Medtronic retired 55.0m of its own shares without paying a dollar for them. The consideration was its remaining stake in MiniMed, a diabetes business that managed an adjusted EBITDA margin of 6% in FY26.[1][2] At the same time the group grew 13.7% organically in the first quarter, faster than in years.[3] I wanted to know whether this combination adds up to a reason to buy. My answer: a good company at a fair price, but not at one that meets my hurdle.
Excluding acquisition amortisation, Medtronic earns 9.6% on invested capital, just above my 8% discount rate. Cardiac ablation drives growth, and the MiniMed exchange works like a free buyback of 4.3% of the shares. My cash flow model gives a fair value of about $110, 17% above the price of $94.23. Over three years I therefore expect 13.0% p.a.; my hurdle is 15%. Rating: Hold, entry only below $89.
This article values the parent after the split-off. I analyse the subsidiary in MiniMed: A Good Split-off Setup, but No Margin of Safety Yet.
1. Growth is back, and it comes from the heart
In Q1 FY27 Medtronic generated revenue of $9,756m, up 13.7% organically. Excluding diabetes it was 13.6%, so growth does not depend on MiniMed.[3] For comparison, organic growth for the whole of fiscal 2026 was 5.8%.[4]
| Segment Q1 FY27 | Organic growth |
|---|---|
| Cardiovascular | 18.9% |
| of which Cardiac Ablation Solutions | 88% |
| Medical Surgical | 10.2% |
| Neuroscience | 9.3% |
| Diabetes (separated) | 14.9% |
| Group | 13.7% |
Source: Q1 FY27 earnings release.[3]
The engine is ablation for atrial fibrillation, up 88%.[3] That is a product wave, not a permanent state: such rates flatten once the technology is established. Management raised full-year guidance for organic growth to 7.25–7.75% and for adjusted EPS to $5.94–6.00.[3] The guidance includes a 53rd week in the fiscal year.[4] Medtronic does not disclose how much of it falls into Q1, so quarterly growth may look somewhat flattering.
2. The MiniMed exchange is a buyback without cash
Medtronic gave up 252.8m MiniMed shares and received 55.0m of its own shares in return.[1] With 1,279.1m shares outstanding at the end of August, that is 4.3% of the share count [own calculation].[5] Around 1,224m shares remain.
On the earnings side, Medtronic gives up little. MiniMed reported a loss in FY26 and negative operating cash flow of $197m.[2] CFO Thierry Piéton described the separation after the exchange as “accretive” without giving a figure.[6] In my model I nevertheless assume no cash flow gain from the departure, only the lower share count.
“Medtronic retired 4.3% of its own shares and paid with a business earning a 6% margin. A buyback is hard to finance better.”
3. Return on capital: 9.6%, just above the cost
This is where it is decided whether Medtronic creates value. I use the FY26 10-K figures.[7]
| Step | Calculation | Result |
|---|---|---|
| Operating income FY26 | per 10-K | $6,467m |
| + amortisation of acquired intangibles | per 10-K | $1,772m |
| × (1 − tax rate 21.2%) | (6,467 + 1,772) × 0.788 | $6,492m |
| Invested capital 04/2026 | 49,463 + 26,173 + 1,788 − 1,949 − 7,271 | $68,204m |
| Invested capital 04/2025 | 48,024 + 25,642 + 2,874 − 2,218 − 6,747 | $67,575m |
| Average | (68,204 + 67,575) ÷ 2 | $67,890m |
| ROIC excluding acquisition amortisation | 6,492 ÷ 67,890 | 9.6% |
| ROIC on GAAP basis | 6,467 × 0.788 ÷ 67,890 | 7.5% |
Formula: ROIC = operating income × (1 − tax rate) ÷ (equity + financial debt − cash − short-term investments). Values from SEC financial data.[7]
Why I treat the adjusted figure as the key one: the $1,772m is amortisation of patents and customer relationships from acquisitions such as Covidien. It burdens earnings without any cash going out today, while the purchase price also sits in capital as $42,587m of goodwill.[7] Counting both penalises old acquisitions twice. Excluding goodwill, even the GAAP ROIC would be 19.8% [own calculation, average goodwill $42,162m], which shows how profitable the business itself is.
I set my discount rate at an 8.0% cost of equity. The weighted cost of capital (WACC) is lower because about 14% debt is cheaper; I deliberately compare against the higher figure. The spread of 1.6 percentage points is positive but thin. On a GAAP basis Medtronic falls just short.
Test return on capital above cost of capital: ✅ narrowly passed, on adjusted basis. Test understandable competitive advantage: ✅ passed. Medtronic sells implants and systems whose approval takes years and which physicians are reluctant to switch once trained.
Growth quality: new capital earns far more than the old
Growth only creates value if the additional capital earns more than it costs. At Medtronic that is clearly the case: from FY24 to FY26 invested capital rose by only $971m, while operating profit after tax rose by $1,104m.[7]
| Step | Calculation | Result |
|---|---|---|
| NOPAT FY24 adjusted | (5,144 + 1,693) × 0.788 | $5,388m |
| NOPAT FY26 adjusted | as above | $6,492m |
| Increase in NOPAT | 6,492 − 5,388 | $1,104m |
| Invested capital 04/2024 | 50,214 + 23,932 + 1,092 − 1,284 − 6,721 | $67,233m |
| Increase in invested capital | 68,204 − 67,233 | $971m |
| Return on incremental capital (ROIIC), adjusted | 1,104 ÷ 971 | about 114% |
| ROIIC on GAAP basis | (6,467 − 5,144) × 0.788 ÷ 971 | about 107% |
Formula: ROIIC = increase in NOPAT ÷ increase in invested capital, FY24 to FY26. Simplified: a uniform 21.2% tax rate for both years [own rough calculation]. The figure is this high because Medtronic barely expanded its capital; measured over two years the ratio is volatile and should be read as a direction.
Test growth quality: ✅ passed. Growth in my valuation model may therefore add value.
4. What Medtronic is worth: about $110
I value Medtronic with a cash flow model based on free cash flow to equity (FCFE). The starting point is FY26 free cash flow of $5,426m: operating cash flow of $7,330m less capital expenditure of $1,904m.[7]
| Step | Calculation | Result |
|---|---|---|
| Shares after exchange | 1,279.1 − 55.0 | 1,224.1m |
| Free cash flow per share | 5,426 ÷ 1,224.1 | $4.43 |
| Bear (25%) | 5% growth, 8.5% discount | $90.57 |
| Base (50%) | 7% growth, 8.0% discount | $108.72 |
| Bull (25%) | 9% growth, 7.5% discount | $131.84 |
| Fair value | 0.25 × 90.57 + 0.5 × 108.72 + 0.25 × 131.84 | $109.96 |
Formula: five years of growth at the scenario rate, then 3% perpetual growth, discounted at the respective rate. Simplified: MiniMed's negative cash flow is not stripped out, which is conservative [own rough calculation].
Bear case (25%)
$90.57
- Ablation flattens quickly
- Cash flow grows 5% p.a.
Base case (50%)
$108.72
- Growth close to full-year guidance
- Cash flow grows 7% p.a.
Bull case (25%)
$131.84
- Ablation and robotics keep delivering
- Cash flow grows 9% p.a.
5. Why a 17% gap does not deliver 15% p.a.
Fair value is 17% above the price. What matters to me, though, is the annual return, and that depends on how quickly the market recognises the value.
| Step | Calculation | Result |
|---|---|---|
| Fair value in three years | 109.96 × 1.05³ | $127.29 |
| + dividends | 3 × 2.88 | $8.64 |
| Total return | 127.29 + 8.64 | $135.93 |
| Return p.a. | (135.93 ÷ 94.23)^(1/3) − 1 | 13.0% |
| Entry for 15% p.a. | 135.93 ÷ 1.15³ | $89.38 |
Formula: (total return ÷ purchase price)^(1/3) − 1. Assumption: intrinsic value grows 5% p.a., i.e. the 8% discount rate minus the roughly 3% dividend yield paid out; constant dividend, no reinvestment [own rough calculation]. The $2.88 dividend is the 49th consecutive increase.[4]
13.0% p.a. is decent for a group of this quality. Medtronic still misses my 15% hurdle, so under my rules the rating can be no better than “Hold”.
6. Upside and risks: ablation versus the extra week and debt
- Ablation grows at double digits for longer than assumed
- Q1 free cash flow: $1,290m after $584m
- Fewer shares and no loss-making business
- Low volatility, reliable dividend
- Q1 growth partly inflated by the extra week
- FY26: adjusted EPS only +0.7%
- GAAP ROIC of 7.5% below my discount rate
- Net debt of $18,741m, tariffs and trade policy
Evidence: cash flow and growth from the quarterly release,[3] FY26 earnings from the annual release,[4] debt from SEC data,[7] trade policy as a risk in the forward-looking statements.[3]
Briefly noted
- Medtronic returned $4.2bn to shareholders in FY26, $1.0bn of it via buybacks.[4]
- The market prices the stock at 15.7x expected earnings, with a 3.1% dividend yield.[8]
- The 8.0% discount rate is my assumption; WACC is lower and not calculated separately.
- Invested capital includes MiniMed until the separation; without MiniMed ROIC would likely rise slightly.
- FY26 free cash flow used as the base without adjusting for MiniMed.
- Share count after the exchange: as at 28 August 2026 minus retired shares.
- Intrinsic value growth of 5% p.a. in the return calculation.
- Return on incremental capital uses a uniform 21.2% tax rate; the actual FY24 rate was 23.4%.
- Medtronic does not disclose the extra week's contribution to Q1 growth; I have not stripped it out.
Conclusion
After the MiniMed exchange, Medtronic is a better company than before: fewer shares, no margin diluter and a cardiac business growing faster than it has in a long time. Adjusted return on capital is 9.6%, just above my discount rate. My fair value is about $110.
At $94.23 that gives 13.0% p.a., not the 15% I require. Rating: Hold. I would add below $89.
Update log
- 25 Oct 2026 — Editorial revision: entry level in the core thesis consistently phrased as “below $89”, working note on the extra week moved into “Open assumptions”, risk heading as a statement. Fair value, scenarios and rating unchanged.
- 19 Oct 2026 — Brought in line with the updated house style: position statement moved into the disclaimer, hero image and image paths added, growth quality test added with calculation (return on incremental capital about 114%, passed). Fair value, scenarios and rating unchanged.
- 15 Oct 2026 — First publication.
Sources
- Medtronic Announces Final Results of MiniMed Group, Inc. Exchange Offer (Form 425), Medtronic plc, 14 Oct 2026. 252.8m MiniMed shares for 55.0m Medtronic shares. → https://www.sec.gov/Archives/edgar/data/0001613103/000162828026065819/a425-finalresultsofexchang.htm
- MiniMed Group, Inc. Form 10-K FY2026, filed 29 Jun 2026. Adjusted EBITDA margin 6%, net loss; operating cash flow −$197m per SEC XBRL. → https://www.sec.gov/Archives/edgar/data/0002062583/000162828026045915/mdt-20260424.htm
- Medtronic Q1 FY27 Earnings Release (8-K Ex. 99.1), 2026. Revenue, segment growth, EPS, free cash flow, raised guidance. → https://www.sec.gov/Archives/edgar/data/0001613103/000162828026059697/exhibit991-fy27q1earningsr.htm
- Medtronic reports fourth quarter and full year fiscal 2026 results, Medtronic plc, 3 Jun 2026. FY26 revenue and growth, EPS, $2.88 dividend, 49th increase, 53rd week, shareholder returns. → https://news.medtronic.com/2026-06-03-Medtronic-reports-fourth-quarter-and-full-year-fiscal-2026-results-delivers-highest-annual-revenue-growth-in-10-years
- SEC XBRL Medtronic, dei:EntityCommonStockSharesOutstanding, 10-Q Q1 FY27. 1,279,137,890 shares as at 28 Aug 2026. → https://data.sec.gov/api/xbrl/companyconcept/CIK0001613103/dei/EntityCommonStockSharesOutstanding.json
- MedTech Dive: Medtronic lowers earnings forecast after MiniMed IPO, 25 Mar 2026. CFO statements on dilution and post-split accretion. → https://www.medtechdive.com/news/medtronic-lowers-earnings-forecast-after-minimed-ipo/815688/
- SEC XBRL Company Facts Medtronic (CIK 1613103), values from 10-K FY2024, FY2025, FY2026 and 10-Q Q1 FY27, retrieved 15 and 19 Oct 2026. Operating income, amortisation, tax rate, equity, financial debt, cash, short-term investments, goodwill, operating cash flow, capex. → https://data.sec.gov/api/xbrl/companyconcept/CIK0001613103/us-gaap/OperatingIncomeLoss.json
- StockAnalysis.com, market data MDT (price $94.23, forward P/E 15.7x, dividend yield 3.1%), as at 14 Oct 2026.