Further Upside For Medtronic Stock

+10.19%
Upside
87.15
Market
96.03
Trefis
MDT: Medtronic logo
MDT
Medtronic

We believe that Medtronic stock (NYSE: MDT) is a good buying opportunity at the present time. MDT stock trades near $115 currently and it is, in fact, down 6% from its pre-Covid high of $121 in February 2020 – just before the coronavirus pandemic hit the world. MDT stock has rallied around 60% since its March lows of $73, in-line with the broader markets, with the S&P 500 seeing 63% gains. The growth in MDT stock is supported by better than estimated revenues and earnings posted in the recent quarters, as we discuss in the section below. Now with economies opening up, the company will likely see improved sales growth and margin expansion, driving the stock higher from here, in our view. Our conclusion is based on our comparative analysis of Medtronic stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

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
  • Since 3/24/2020: S&P 500 recovers 62% 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.
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In contrast, here is how MDT stock and the broader market fared during the 2007-08 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
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

MDT and S&P 500 Performance Over 2007-08 Financial Crisis

MDT stock declined from levels of about $58 in September 2007 (pre-crisis peak) to levels of $30 in March 2009 (as the markets bottomed out), implying MDT stock lost 49%. It recovered post the 2008 crisis, rallying 49% to levels of $44 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in September 2007 to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

Medtronic Fundamentals Over Recent Years Have Been Robust

Medtronic’s revenues increased from $28.8 billion in fiscal 2016 (fiscal ends in April) to $30.6 billion in 2019, but declined to $28.9 billion in 2020, owing to the impact of the pandemic. The company has also seen its adjusted Net Margins expand from 21.6% to 23.2% between 2016 and 2019, before dropping to 21.5% in 2020. More recently, Medtronic posted 1% revenue decline in Q2 fiscal 2021, as a 7% growth in Minimally Invasive Therapies Group was more than offset by sales decline in other segments. The company’s earnings of $1.02 per share declined 22% compared to $1.31 in prior year quarter, on an adjusted basis.

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

Medtronic’s total debt increased from $26 billion in 2016 to $30 billion at the end of Q2 2021, while its total cash remained at about $14 billion over the same period. Medtronic generated $2 billion in cash from operations in the first six months of fiscal 2021. While the company’s debt levels are high, the company has enough liquidity cushion to weather the current 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-October 2020: After poor Q2 results, Q3 expectations were lukewarm, but continued improvement in demand, and progress with vaccine development buoyed market sentiment

As the global economy opens up and lockdowns are lifted in phases, consumer demand is expected to pick up. This could be reflected in the form of a pick-up in revenue toward the end of 2020, followed by revenue growth in 2021, boding well for the MDT stock in the near term. While MDT stock has 6% upside for it to recover to pre-Covid highs, we believe the stock could trend much higher than that in the near term.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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