Buy, Sell, Or Hold Medtronic At $100?

by Trefis Team
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Medtronic (NYSE: MDT) stock declined 12% from $115 levels in the beginning of this year to $101 levels on April 20, compared to a 13% decline for the broader S&P 500. While Medtronic’s stock has performed in line with the broader markets, we believe there is only a limited upside from the current levels. The key is Medtronic stock is up 25% since the start of 2018, a little over two years ago, and after seeing a significant decline in March 2020, given the current coronavirus crisis, and its impact on the global economy, Medtronic’s stock has already recovered around 40% from its recent lows (vs. around 25% rebound for S&P 500). Our dashboard,What Factors Drove 24.5% Change In Medtronic’s Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price gain over the past two years can primarily be attributed to steady revenue and earnings growth for the company. Medtronic’s revenues were up 3% from 2017 to 2019. This combined with a 12% jump in net income margin from 13.6% in 2017 to 15.2% in 2019, helped earnings per share growth of 18%. Note that these numbers are based on Medtronic’s GAAP results. Medtronic reported a decline in fiscal 2018 EPS, due to impact of changes in the U.S. tax laws, which resulted in lower net income margin, and EPS.

An increase in Medtronic’s P/E multiple also aided the rise in the company’s earnings between 2017 and 2019. Medtronic’s P/E multiple grew from 26.3x in 2017 to 32.8x in 2019. Though P/E multiple surged to 38.7x in 2018, due to the impact of tax adjustments, resulting in lower EPS and higher P/E multiple. Moreover, Medtronic’s P/E is down to about 27.8x now, given the volatility of the current situation. This reflects an 5.7% decrease in P/E multiple since December 2017. We believe there is a limited upside for Medtronic’s multiple when compared to levels seen over recent years – P/E of 33x at the end of 2019, and 28x currently.

How Is Coronavirus Impacting Medtronic’s Stock

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact medical device companies, such as Medtronic, as it faces supply chain disruptions, and potential impact on direct sales due to postponement of minor health related issues and surgeries. Between January 31st and April 20th, Medtronic’s stock has lost close to 12% of its value (vs. about a 13% decline in the S&P 500). A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia.

For Medtronic, the U.S. as a region accounts for over 52% of total sales. The U.S. has become the new epicenter of the outbreak, with the country recording the largest numbers of COVID-19 cases across the globe. Medtronic is primarily working on expansion of ventilator production in the current period. Medtronic, in an admirable gesture, made the design and specifications of its portable ventilator publicly available online to help increase the global production of ventilators. Despite the company’s supply for ventilators, revenues in the near term are likely to be impacted by the ongoing crisis. We believe Medtronic’s Q4 fiscal 2020 results in May will confirm the trend in revenues. It is also likely to accompany lower guidance for the full year. Going by our valuation for Medtronic, we believe that the company’s stock has a limited upside potential from the current levels.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.


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