VALUATION HIGHLIGHTS

1. Neuroscience constitutes 40% of the Trefis price estimate for Medtronic's stock.
2. Medical Surgical constitutes 38% of the Trefis price estimate for Medtronic's stock.
3. Cardiac Rhythm Management constitutes 18% of the Trefis price estimate for Medtronic's stock.

WHAT HAS CHANGED?

Note: Medtronic's fiscal year ends on April 30

1. MDT Stock Performance

MDT stock has faced a notable decline of 25% from levels of $115 in early January 2021 to around $85 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

Notably, MDT stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -12% in 2021, -25% in 2022, and 6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that MDT underperformed the S&P in 2021, 2022 and 2023.

2. Q3 Fiscal 2024 Performance

Medtronic posted a 4.7% revenue rise in Q3 fiscal 2024, driven by steady growth in all segments. The Neuroscience segment saw 4.8% growth, Cardiovascular sales were up 6.1%, Medical Surgical also up 3.9%, and Diabetes sales were up 12.3%. The company's earnings of $1.30 on a per share and adjusted basis were flat year-over-year.

3. 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 $81 on March 23, 2020, when broader markets made a bottom. The stock has since seen a marginal recovery to around $85 currently (end of February 2024).

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.

4. Diabetes Care Sales

Medtronic's diabetes care sales grew 37% from $1.8 billion in fiscal 2015 to $2.3 billion in fiscal 2023, and they are expected to grow to around $3.5 billion by the end of our forecast period.

However, the sales growth has stalled in 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 now launched 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 $9.0 billion in 2023, 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 $11 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 66% in 2023 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 70% by the end of our forecast period. However, if the company manages to reduce costs and 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.

SOURCES OF VALUE

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 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 its market share. It acquired Crospon, an 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 recent years.

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 48% of its overall net sales in FY 2023.

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.