Medtronic Stock Remains Attractive At $125 Levels

[Updated: 6/25/2021] Medtronic Update

Medtronic stock (NYSE: MDT) has seen an 8% rise so far this year, slightly underperforming the broader markets with the S&P 500 up 15%. While the Covid-19 pandemic weighed on the company’s performance over the past few quarters, the opening up of economies would mean a rebound in demand for medical devices, boding well for MDT stock. Furthermore, there have been multiple positive developments for Medtronic over the recent past. The U.S. FDA recently expanded the use of Medtronic’s Arctic Front, a cryoablation catheter to treat atrial fibrillation. The Arctic Front system was first approved in 2010, and Medtronic has received multiple approvals for the device over the past few years. With the expansion of using the Arctic Front to treat atrial fibrillation, Medtronic has expanded the scope of the device, and it should bode well for the company.

Earlier this month, the company announced that the U.S. FDA has approved Vanta, an implantable neurostimulator that offers 11 year battery life. The new device represents a 10% increase in longevity and it is 20% smaller in size compared to the company’s previous generation neurostimulator – PrimeAdvanced. There are a few other regulatory approvals that the company has secured within a span of a month.

Medtronic’s robotic assisted surgical system – Hugo – performed its debut surgery earlier this week. Hugo allows the surgeon to control up to four independent robotic arms during the procedure from one console. Robotic assisted surgeries have gained traction over the recent years, given its advantages, such as fewer scars and less recovery time, among others. Although Medtronic’s Hugo can easily be moved within a hospital, unlike Intuitive Surgical’s da Vinci systems, which are immovable once fixed, Medtronic has a long road ahead to catch up to Intuitive Surgical, given that the latter already has over 6,000 robotic surgical systems placed globally.

Medtronic has a lot to look forward to with its continued innovation and new product launches. Now that over 45% of the U.S. population is fully vaccinated, the U.S. economy is expected to see a rebound. This will result in higher demand for Medtronic’s products, which saw a sluggish demand last year, as many people and healthcare institutions decided to postpone elective surgeries. Going by our Medtronic Valuation, with an EPS estimate of around $5.71 and P/E multiple of 26x in fiscal 2022, this translates into a price of $148, which reflects nearly 20% premium to the current market price of around $125.

[Updated: 5/24/2021] Medtronic Earnings Preview

Medtronic stock (NYSE: MDT) is scheduled to report its fiscal fourth-quarter results on Thursday, May 27. We expect Medtronic to likely post revenues and earnings below the consensus estimates. While the company is likely to benefit from an improved demand for medical devices with a rebound in the volume of elective surgeries, a resurgence in Covid-19 cases may impact the company’s overall revenue growth.

Our forecast indicates that Medtronic’s valuation is around $133 per share, which is only 5% above the current market price of around $127. Look at our interactive dashboard analysis on Medtronic Pre-Earnings: What To Expect in Q4? for more details.

(1) Revenues expected to be slightly below the consensus estimate

Trefis estimates Medtronic’s Q4 fiscal 2021 total revenues to be around $8.10 billion, just a tad below $8.14 billion consensus estimates. While medical devices sales were heavily impacted due to the Covid pandemic, the improved demand with resumption of elective surgeries likely helped the company navigate well during the quarter. While Diabetes, Minimally Invasive Therapies Group, and Restorative Therapies Group segments combined have seen a rise of 3.5% y-o-y to $5.1 billion in Q3, this growth was largely offset by a 4.0% decline seen in Cardiac & Vascular Group, due to resurgence of Covid-19 cases, .impacting the overall elective surgeries volume. Our dashboard on Medtronic’s Revenues provides more details on segment-wise revenue breakup.

2) EPS likely to be below the consensus estimates

Medtronic’s Q4 2021 earnings per share (EPS) is expected to be $1.37 per Trefis analysis, 3.5% below the consensus estimate of $1.42. Medtronic’s Non-GAAP net income of $1.8 billion in Q3, reflected a 10% drop from its $1.9 billion profit in the prior year quarter, primarily due to a 270 bps contraction in the net margins, owing to the increased costs during the pandemic. Looking at the full fiscal 2021, we expect a 6% y-o-y decline in EPS to $4.30, due to margin contraction.

(3) Stock price estimate slightly above the current market price

Going by our Medtronic Valuation, with an EPS estimate of around $4.30 and P/E multiple of 31x in fiscal 2021, this translates into a price of $133, which is 5% above the current market price of around $127. Although the coronavirus outbreak has had a sizable impact on Medtronic’s business over the past few quarters, due to deferment of elective surgeries, we believe the demand for medical devices will rebound as the spread of the virus subsides, especially with large scale vaccination programs underway in several countries.

Note: P/E Multiples are based on Share Price at the end of the year, and reported (or expected) Adjusted Earnings for the full year

[Updated: 3/23/2021] Buy Or Sell MDT Stock

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.