VALUATION HIGHLIGHTS

1. Medical Surgical constitutes 38% of the Trefis price estimate for Medtronic's stock.
2. Neuroscience constitutes 38% of the Trefis price estimate for Medtronic's stock.
3. Cardiovascular constitutes 20% of the Trefis price estimate for Medtronic's stock.

WHAT HAS CHANGED?

1. Impact of Coronavirus Crisis On Medtronic Stock

The coronavirus crisis impacted Medtronic's sales in 2020, primarily due to a decline in the number of procedures performed. Medtronic's stock declined from levels of $114 in early Jan 2020 to $73 on Mar 23, 2020, when broader markets made a bottom. The stock has since recovered to $96 currently (through June 8, 2022), underperforming the broader indices, with the S&P 500 up nearly 84% off the Mar 2020 bottom. Medtronic stock took a bigger hit compared to some of its peers, considering its higher exposure to the U.S. market (more than half of the total revenue), which became the epicenter of the crisis with the highest number of Covid-19 cases in the world.

2. Q4 Fiscal 2022 Performance

Medtronic posted a 1% revenue decline in Q4 fiscal 2022, as a mid-single-digit gain in the Cardiovascular segment was more than offset by a mid-single-digit decline in the Medical-Surgical segment and a high-single-digit drop in Diabetes segment sales. The company's earnings of $1.52 on a per share and adjusted basis, reflect a 2% rise from the $1.49 figure seen in the prior-year quarter.

3. Diabetes Care Sales

Medtronic’s diabetes care sales grew 37% from $1.8 billion in fiscal 2015 to $2.3 billion in fiscal 2022, and they are expected to grow to around $3.0 billion by the end of our forecast period.

However, the sales growth has stalled in the recent quarters due to delays in the approval of new products in the U.S. Looking forward, there are high hopes for Medtronic’s most advanced insulin pump system – MiniMed 780G – to drive its diabetes sales in the future. The product is yet to be approved in the U.S. The underperformance of MDT stock stated above can be linked to the concerns over the delay in the MiniMed 780G approval. Late last year, the U.S. FDA issued a warning to Medtronic’s diabetes business facility in California, citing inadequacies in quality system requirements, which may delay its 780G approval in the U.S.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Medtronic's value that present opportunities for upside or downside to the current Trefis price estimate for the company's stock:

Neurological Products

• Medtronic's Neuroscience: revenue has increased marginally from $8.2 billion in fiscal 2019 to $8.8 billion in 2022, led by higher sales for its Cranial & Spinal Technologies, and Specialty Therapies.
  We forecast mid-single-digit annual growth in revenues to the north of $10.5 billion by the end of our forecast period. However, if the company sees growth at a faster pace in low-double-digits, and revenues reach north of $17.0 billion, it would result in a 15% upside to our price estimate. If the company fails to see strong growth in the business and sees revenue remain around $9 billion, it would translate into a downside of around 5% to our price estimate.

Medtronic's Gross Profit Margin

• Medtronic's Gross Profit Margin: Medtronic's Gross Margin gradually declined from 76% in 2011 to 68% in 2022, due to increasing competition, reduced reimbursements, and other pricing pressures.
  We forecast the company's gross margin to improve slightly from the current levels to 71% by the end of our forecast period. However, if the company manages to reduce costs, improve pricing, and margins reach historical highs of 76% by the end of our forecast period, it would translate into an upside of 10% to our price estimate. However, if the pricing pressure amid competition weighs on gross margins, and they decline further to around 65%, it would translate into a 15% decline in our price estimate.

BUSINESS SUMMARY

Headquartered in Dublin, Ireland, Medtronic plc. supplies self-manufactured medical devices and therapies to treat more than 30 chronic diseases across 150 countries in the world. Medtronic operates in the following broad segments - Cardiac and Vascular Group (Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, Aortic & Peripheral Vascular), Minimally Invasive Technologies Group (Surgical Solutions, Patient Monitoring, and Recovery), Restorative Therapies Group (Spine, Neuromodulation, Neurovascular, Surgical Technologies) and Diabetes Group. The company is a global leader in the Cardiac Rhythm Disease Management, Spinal, and Neuromodulation segments. Its main competitors are Johnson & Johnson, Boston Scientific, and Abbott.

Medtronic acquired Crospon, a endoscopic diagnostics company in Feb 2018. Crospon offers tools to diagnose, and measure gastroesophageal motility disorders. The deal was valued at around $45 million. Earlier in 2015, Medtronic acquired Covidien for approximately $50 billion.

SOURCES OF VALUE

Surgical & Patient monitoring products, Neurological products, Cardiac rhythm management devices, Cardiovascular products, and Diabetes products are the major sources of revenue for the company. This is explained by the following factors:

Relentless Portfolio Diversification

Medtronic continuously launches new and innovative products in the market to retain or increase its market share. In 2018, the FDA approved Medtronic's Remodulin to treat patients with Pulmonary Arterial Hypertension. It also secured an approval for Less-Invasive Heart Pump Implant Procedure for its HVAD system. These approvals should aid the future growth.

Acquisitions For Business Expansion

Through a few strategic acquisitions, Medtronic has expanded its business and increased market share. It acquired Crospon, a endoscopic diagnostics company in Feb 2018. Crospon offers tools to diagnose, and measure gastroesophageal motility disorders. Earlier in 2015, Medtronic acquired Covidien for approximately $50 billion. In the past, it acquired Ardian for $800 million and Osteotech for $123 million in 2011 to boost its Cardiovascular and Spinal sales, respectively.

KEY TRENDS

Impact of Covid-19 Pandemic

The Covid-19 pandemic resulted in the restricted movement of people across the globe in 2020. Most of the hospitals and healthcare institutions were focused on the treatment of Covid-19 related patients and working on emergency cases. As such, there was a decline in elective surgeries, which impacted Medtronic's sales. However, now that several countries have undertaken large-scale vaccination programs for Covid-19, the sales rebounded in fiscal 2022.

Still, the ongoing Covid-19-related lockdowns in China in Q2 2022, and global supply chain disruption are likely to weigh on Medtronic's sales in the near future.

Enterprise Excellence Program To Prove Beneficial

In 2018, Medtronic initiated a global restructuring program, which includes optimization of its processes, and is aimed to improve operating margins. The company expects an annual gross saving of around $3 billion under this program. This program should help the company increase sales through enhanced focus on high-growth areas, and also cut costs.

Geographical Expansion

Medtronic is witnessing an increasing share of international sales that have mainly come from China, India, and Brazil. Medtronic's revenue from outside the U.S accounted for 47% of its overall net sales in FY 2019.

Healthcare Reform Could Impact Selling Prices

Stringent healthcare regulations have implemented checks on the pricing structure of medical device companies, which is expected to negatively affect the profits of the industry.