Medtronic Stock Appears Attractive Around $100 Levels

We believe that Medtronic stock (NYSE:MDT) could offer an upside of roughly 15% from the current levels. MDT stock trades at $102 currently and it is down 9% so far this year as well as from the pre-Covid high of $112 seen in February. Also, MDT stock has gained 42% from the low of $72 seen in March 2020, as the Fed stimulus largely put investor concerns about the near-term survival of companies to rest.

For Medtronic, deferment of elective surgeries earlier in the year impacted its sales, especially in Q2, as we discuss in the sections below. However, many healthcare institutions are now attending to the procedures, and given the postponement, there is a backlog to attend to. This will likely result in increased demand for medical devices companies at large, including Medtronic. For perspective, the backlog for orthopedic surgeries alone is expected to be over 1 million post pandemic. ^[1] 

Additionally, Medtronic generates over 51% of its sales from the U.S., and this should bode well for the company, given that the U.S. is seeing a robust recovery in the economy. In fact, the U.S. GDP is estimated to top 30% growth in Q3 after falling over 31% annualized rate in Q2. The reliance on the U.S. market is lower for some of Medtronic’s peers, such as Abbott at 36%. In view of the economic growth as well as growth in elective surgeries, we believe that the stock has more than 15% upside in the near future. Our conclusion is based on our detailed analysis of Medtronic’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 50% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how Medtronic and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Medtronic vs S&P 500 Performance Over 2007-08 Financial Crisis

MDT stock declined from levels of around $44 in September 2007 (pre-crisis peak) to levels of around $23 in March 2009 (as the markets bottomed out), implying MDT stock lost 48% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $35 in early 2010, rising by 51% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% followed by a recovery of 48%.

Medtronic’s Fundamentals in Recent Years Look Strong

Though Medtronic’s Revenue grew steadily from $28.8 billion in fiscal 2016 to $30.6 billion in fiscal 2019 (fiscal ends in April), it declined to $28.9 billion in 2020, primarily due to the impact of Covid-19. The company’s margins expanded from 12.3% to 16.6%, resulting in a strong 43% EPS growth from $2.51 in fiscal 2016 to $3.57 in fiscal 2020. However, the company’s Q1 fiscal 2021 revenues were 13% below the level seen a year ago, and the EPS figure for the quarter slid from $0.64 in Q1 fiscal 2020 to $0.36 in Q1 fiscal 2021.

Does Medtronic Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Medtronic’s total debt increased from $25.9 billion in 2017 to $28.7 billion at the end of Q1 fiscal 2021, while its total cash decreased from $13.7 billion to $13.0 billion over the same period. The company also generated $278 million in cash from its operations in the first quarter of fiscal 2021, and it appears to be in a reasonable position to weather the crisis.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Going by the historical performance and in view of the growth in elective surgeries, we believe that MDT stock has roughly 15% room for growth in the near future.

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1. The Journal of Bone & Joint Surgery [↩]