Could Medtronic Stock See A 35% Decline From Current Levels?

Despite a 17% decline in Medtronic’s stock (NYSE: MDT) since the beginning of the year, at the current price of around $95, Medtronic’s stock could see a significant downside, due to the impact of the coronavirus crisis. Medtronic has outperformed the broader markets over the last two years.  The stock is up 17% since the end of May 2018, as compared to 9% growth for the S&P 500 over the same period. Our dashboard, ‘Medtronic Downside: How Low Can MDT Stock Go?‘ provides the key numbers behind our thinking, and we explain more below.

A significant contributor to Medtronic’s stock price growth over the last two years has been the expansion of its P/E multiple, which on a trailing basis, grew from about 17.3x in 2018 to 20.8x currently. The company saw its sales decline 3.5% between fiscal 2018 and fiscal 2020 (Medtronic’s fiscal year ends in April). This decline was primarily led by lower Cardiac & Vascular Group sales. Restrictions on elective surgeries over the last few months largely impacted this decline. The stock price, in anticipation of slower sales and earnings growth, corrected from $115 levels in the beginning of 2020 to $95 currently.

So what’s the likely trigger and timing to this downside?

The current coronavirus crisis is having a significant impact on Medtronic’s business, evident from the company’s recently reported fiscal Q4 numbers. The company reported a 25% drop in revenues, while EPS plunged 52% on an adjusted basis. The company’s business was primarily affected by procedure volume decline, as restrictions were implemented on elective procedures, and in some cases, people choosing to defer treatments. The current crisis not only impacted the company’s revenues, also its gross margins, which plunged 700 basis points, due to increased costs, and higher sales of low-margin products.

Given the trends, fiscal 2021 will likely be challenging for Medtronic. The company in its recent earnings conference call stated that Q1 fiscal 2021 could be modestly worse than fiscal Q4 2020. As such, we consider a scenario for fiscal 2021, with investors revising their expectations for the full-fiscal revenue to be closer to $25.3 billion, about 16% lower than fiscal 2018 revenue of $30.0 billion, and 13% lower than the fiscal 2020 revenue of $28.9 billion. The market isn’t going to receive this well, and this could result in Medtronic’s P/E Multiple falling to its historical average of around 17.0x, compared to 20.8x currently. This would mean a double whammy of 23% lower earnings and 18% lower P/E multiple, translating into Medtronic’s price drop of over 35%, to about $60 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse over the next few quarters, and as the coronavirus crisis is tamed, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Compared to Medtronic, its peer, Abbott, is doing much better, thanks to Abbott’s COVID-19 tests.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies, including Union Pacific and Adobe. The complete set of coronavirus impact and timing analyses is available here.

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