Price to Sales The price to sales ratio contains drawbacks as well as advantages. An advantage to using price to sales, is that sales is a difficult numbers to manipulate. This ratio can be useful when valuing companies with high fluctuations in sales, but it can be deceiving at times. The price to sales ratio fails to account for how well the firm is able to retain these revenues, through high profit margins as well as low operating expenses. Conversely, a firm could report a high volume of sales but low earnings as a result of poor cost management. The following table represents Medtronic’s price to sales in relation to comparable companies, and calculation for multiples analysis. Price to Name (Ticker) Medtronic’s price to sales ratio is higher than all Sales but one of its competitors, Edwards Lifesciences. Industry Average 4.11 Medtronic outperforms all competitors besides Sector Average 5.47 Abbott when it comes to total revenues. However, Medtronic (MDT) 3.56 its price to sales ratio indicates that the market is Abbott Laboratories (ABT) 2.73 CR Bard Inc (BCR) 3.7 overvaluing these sales. This overvaluation can Baxter International (BAX) 2.55 be attributed to the fact that Medtronic is able to Becton Dickinson and Co (BDX) 2.64 retain more money from its sales due to higher Boston Scientific (BSX) 2.25 margins than competitors. In effect, this leaves St. Jude Medical Inc. (STJ) 3.07 more cash to distribute back to equity holders. Stryker Corporation (SYK) 3.16 Investors are willing to pay more for Medtronic’s Edwards Lifesciences (EW) 3.64 revenues compared to competitors because they Zimmer Holdings Inc. (ZMH) 3.38 receive more benefit per dollar of sales in the Carefusion Corp. (CFN) 2.42 long run. Medtronic’s price to sales ratio is 3.56, Average of Comparables 2.95 while competitors are averaging 2.95. Based on Standard Deviation 0.49 these ratios, MDT is overvalued by$9.88 or 17%. Median 2.9 Price/Sales MDT Closing Price (11/09/2013) $58.03 MDT Price/Sales 3.56 Sales 16.301
Price to Sales The price to sales ratio contains drawbacks as well as advantages. An advantage to using price to sales, is that sales is a difficult numbers to manipulate. This ratio can be useful when valuing companies with high fluctuations in sales, but it can be deceiving at times. The price to sales ratio fails to account for how well the firm is able to retain these revenues, through high profit margins as well as low operating expenses. Conversely, a firm could report a high volume of sales but low earnings as a result of poor cost management. The following table represents Medtronic’s price to sales in relation to comparable companies, and calculation for multiples analysis. Name (Ticker) Price to Sales Industry Average 4.11 Sector Average 5.47 Medtronic (MDT) 3.56 Abbott Laboratories (ABT) 2.73 CR Bard Inc (BCR) 3.7 Baxter International (BAX) 2.55 Becton Dickinson and Co (BDX) 2.64 Boston Scientific (BSX) 2.25 St. Jude Medical Inc. (STJ) 3.07 Stryker Corporation (SYK) 3.16 Edwards Lifesciences (EW) 3.64 Zimmer Holdings Inc. (ZMH) 3.38 Carefusion Corp. (CFN) 2.42 Average of Comparables 2.95 Standard Deviation 0.49 Median 2.9 Medtronic’s price to sales ratio is higher than all but one of its competitors, Edwards Lifesciences. Medtronic outperforms all competitors besides Abbott when it comes to total revenues. However, its price to sales ratio indicates that the market is overvaluing these sales. This overvaluation can be attributed to the fact that Medtronic is able to retain more money from its sales due to higher margins than competitors. In effect, this leaves more cash to distribute back to equity holders. Investors are willing to pay more for Medtronic’s revenues compared to competitors because they receive more benefit per dollar of sales in the long run. Medtronic’s price to sales ratio is 3.56, while competitors are averaging 2.95. Based on these ratios, MDT is overvalued by$9.88 or 17%. Price/Sales MDT Closing Price (11/09/2013) $58.03 MDT Price/Sales 3.56 Sales 16.301