This Medical Devices Company Is Likely To Offer Better Returns Over Medtronic Stock

MDT: Medtronic logo

We think that Stryker Corp. stock (NYSE: SYK) currently is a better pick compared to its industry peer, Medtronic stock (NYSE: MDT), despite it being the more expensive of the two, trading at 5.7x trailing revenues compared to 4.7x for Medtronic. Even if we were to look at the P/EBIT ratio, SYK stock appears to be more expensive, with a 38x P/EBIT ratio than 24x for MDT stock. Although both the companies saw a rise in revenue in the recent past, Stryker’s growth has been better.

If we look at stock returns, Stryker’s 8% growth is much better than Medtronic’s -6% change over the last twelve months. This compares with 10% growth in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Stryker is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that SYK stock will offer better returns than MDT stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Stryker vs. MedtronicWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Stryker’s Revenue Growth Has Been Stronger

  • Both companies posted sales growth over the last twelve months. Still, Stryker’s revenue growth of 19% is higher than 14% for Medtronic.
  • Looking at a longer time frame, Stryker’s sales grew at a CAGR of 8.4% to $17.1 billion in 2021, compared to $13.6 billion in 2018, while Medtronic’s sales grew at a CAGR of 0.3% to $30.1 billion in 2021, compared to around $30.0 billion in 2018.
  • Stryker’s revenue growth has been driven by new product launches, such as – Surgi-Count+ – a surgical sponge counting system. Last month, it launched Insignia Hip Stem and Power-PRO 2 ambulance cot. The new launches are likely to aid its revenue growth going forward.
  • Stryker’s revenue growth has also been buoyed by the acquisition of Wright Medical, a medical device company, in late 2020. Earlier this year, Stryker agreed to acquire Vocera Communications – a company focused on communications systems for the healthcare industry.
  • Medtronic’s sales were hurt during the pandemic due to the postponement of elective surgeries. The rise of new Covid-19 variants, including Delta and Omicron, impacted demand recovery.
  • There are high hopes for Medtronic’s most advanced insulin pump system – MiniMed 780G – to drive its diabetes products sales in the future. The product is yet to be approved in the U.S. The underperformance of MDT stock stated earlier in this article can be linked to the concerns over the delay in MiniMed 780G approval. Late last year, the U.S. FDA issued a warning to Medtronic’s diabetes business facility in California, citing inadequacies in quality system requirements.
  • Our Stryker Revenue and Medtronic Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Stryker’s revenue is expected to grow at a faster pace compared to Medtronic over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 7.4% for Stryker, compared to a 2.1% CAGR for Medtronic, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Medtronic Is More Profitable, And It Has A Better Cash Position

  • Medtronic’s operating margin of 19.6% over the last twelve-month period is better than 15.1% for Stryker.
  • This compares with 25.2% and 18.2% figures seen in 2019, before the pandemic, respectively.
  • Medtronic’s free cash flow margin of 22.1% is slightly better than 19.1% for Stryker.
  • Our Stryker Operating Income and Medtronic Operating Income dashboards have more details.
  • Looking at financial risk, Stryker’s 13% debt as a percentage of equity is lower than 17% for Medtronic, while the latter’s 12% cash as a percentage of assets is higher than the 9% for Stryker, implying that SYK has a better debt position, but MDT stock has more cash cushion.

3. The Net of It All

  • We see that Stryker has demonstrated better revenue growth, a better debt position, and is available at a comparatively lower valuation. However, Medtronic is more profitable, and it has more cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Stryker is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Stryker and Medtronic over the next three years and points to an expected return of 18% for Stryker over this period vs. a 3% expected return for MDT stock, implying that investors are better off buying SYK over MDT, based on Trefis Machine Learning analysis – Stryker vs. Medtronic – which also provides more details on how we arrive at these numbers.

While SYK stock may outperform MDT, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Medtronic vs. Masco.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Apr 2022
MTD [1]
YTD [1]
Total [2]
SYK Return -3% -3% 116%
MDT Return 0% 8% 56%
S&P 500 Return 0% -5% 102%
Trefis Multi-Strategy Portfolio 0% -8% 262%

[1] Month-to-date and year-to-date as of 4/7/2022
[2] Cumulative total returns since the end of 2016

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