Medtronic Stock Looks Attractive At $107

Despite a 46% rise since the March 23 lows of this year, at the current price of around $107 per share we believe Medtronic’s stock (NYSE: MDT) looks attractive and it has more room for growth. MDT stock has moved from $73 to $107 off the recent bottom compared to the S&P which moved 55%, with the resumption of economic activities as lockdowns are gradually lifted. MDT stock has partially recovered to the levels it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Furthermore, MDT stock is also up 21% from levels seen in early 2019.

Most of the 21% rise can be attributed to the 26% expansion of its P/E multiple, while its revenues and earnings saw a slight decline. Medtronic’s revenues declined 3.5% from $30.0 billion to $28.9 billion between fiscal 2018 and fiscal 2020 (fiscal ends in April), and this translated into a similar decline in Non-GAAP EPS, as a low single-digit decline in net income margin was offset by a similar decline in total shares outstanding. We believe the stock is likely to see more upside despite the recent uptick and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 21% Change in Medtronic Stock between 2018 and now?‘, has the underlying numbers.

Medtronic’s P/E multiple changed from 18x in 2018 to 21x in 2019. While the company ‘s P/E is 23x now, there is a potential upside when we look at forward earnings growth.

So what’s the likely trigger and timing for further upside?

The global spread of coronavirus has resulted in postponement of elective surgeries, especially in the quarter just ended, as health care institutions primarily focus on Covid-19 and other emergency cases. This directly impacts the business of Medtronic, which makes implantable mechanical devices, drug and biologic delivery devices, and powered and advanced energy surgical instruments used in the medical field. Medtronic’s recently reported Q1 fiscal 2021 results confirmed the hit to its revenues, with a 13% decline. The company’s margins also declined resulting in Non-GAAP earnings to halve to $0.62, compared to $1.26 in the prior year quarter. Note that these results were much better than street estimates, and MDT stock has rallied 7% since the results announcement on Aug 25.

That said, we believe this is a transient phase for the medical devices industry, and most of the surgeries being postponed will eventually be attended to by the healthcare institutions, as once advised for a surgery, it is unlikely that anyone will want to cancel it. In fact, healthcare institutions have to deal with a massive backlog, which is estimated to be over a million surgeries only for joint replacement and spine cases in the US post-pandemic.

While Medtronic stock appears expensive when compared to its historical P/E multiple of 21x in 2019, it is trading at 19x its estimated earnings for fiscal 2022, when the company expects the business to return to normalcy. This is much lower when compared to 28x P/E multiple for Abbott and 25x for Boston Scientific, based on forward earnings. Interestingly, Medtronic’s Net Margins (Non-GAAP) at over 21% in fiscal 2020 are higher than 18% for Abbott and in-line with 21% for Boston Scientific in 2019.

Overall, we believe that Medtronic will likely see steady revenue and earnings growth over the coming years, and the stock trading at just 18x its fiscal 2022 expected earnings appears to be an attractive level for investors wiling to invest for the long-term.

Looking at the broader economy, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

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