Should You Buy Medtronic At $117?

Medtronic (NYSE: MDT) looks attractive at current levels of $117, as it is up 60% from the levels it was at on March 23, 2020, when broader markets made a bottom due to the spread of Covid-19. This marks an underperformance compared to the S&P which has moved 75% since its March 2020 lows, with the resumption of economic activities as lockdowns are gradually lifted and vaccination programs have been initiated in multiple countries. This underperformance can primarily be attributed to the deferment of elective surgeries in the first half of 2020, impacting the demand for Medtronic’s devices and consumables. As we look forward, the volume of surgeries is expected to rise in 2021, and this will likely bode well for MDT stock. Even if we were to look at a longer time period, MDT stock is up only 45% from levels seen toward the end of 2017.

Medtronic’s fundamentals have been mixed over the recent years. The company’s total revenue declined 3.5% to $28.9 billion in 2020, compared to $30.0 billion in 2018. The sales have further dropped to $27.9 billion over the last twelve month period. However, the decline in top-line can largely be attributed to the impact of the pandemic on overall elective surgeries volume. While the top-line has contracted, Medtronic posted a 620 bps expansion of net margins between 2018 and 2020. Again, the margins also declined over the last twelve month period owing to the increased operating costs during the pandemic. The company’s total shares saw a decline of 1% over this period, and on a per share basis, earnings grew a solid 56% to $3.57 in 2020, as compared to $2.29 in 2018. Although Medtronic’s P/E multiple has contracted, given the mixed performance over the recent years, we believe it will likely expand going forward. Our dashboard, ‘What Factors Drove 45% Change In Medtronic Stock between 2017 and now?‘, has the underlying numbers.

Medtronic’s P/E multiple contracted from 40x in 2018 to 33x in 2020 based on trailing EPS. While the company’s P/E is still at 33x now, it can see an expansion in the near term, led by steady earnings growth. We discuss more in the section below.

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

For Medtronic, its Diabetes Group segment has been the key growth driver, with sales growth of 11% between 2018 and 2020. Among other segments, the company’s Cardiac & Vascular Group segment has seen the largest decline (8% between 2018 and 2020), partly due to an increased competition from Boston Scientific.  Looking at the company’s fiscal Q3 2021 (fiscal ends in April), the Cardiac & Vascular segment was the only segment to see sales decline, while all other segments witnessed a rebound in demand. Now, as the Covid-19 crisis winds down, the volume growth for elective surgeries is expected to rise, boding well for Medtronic’s businesses. For Medtronic, its focus on new product launches will be the key growth driver going forward, given the stiff competition in the industry. Medtronic over the recent months has launched multiple products, including Carpediem Cardio-Renal Pediatric Dialysis and Adaptix Interbody System, among others. The company also secured regulatory approval for the use of Midas Rex high-speed drills with the Mazor Robotic Guidance System. These launches and approvals will bode well for its top-line expansion over the coming years.