Is There A Better Pick Over Medtronic Stock?

MDT: Medtronic logo

We think that CVS Health stock (NYSE: CVS) is currently a better pick than Medtronic stock (NYSE: MDT), given CVS’s better prospects and comparatively lower valuation. CVS stock trades at a P/S ratio of 0.4x, compared to 4.4x for MDT stock. Even if we were to look at the P/EBIT ratio, MDT stock appears to be more expensive, with a 22x P/EBIT ratio, much less than 8x for CVS stock. The gap in the valuation of these two companies can be attributed to the higher profitability of Medtronic. Although both the companies are in different businesses, we compare them due to their similar market capitalization. While both companies saw a rise in revenue in recent years, CVS’ growth has been better.

Looking at stock returns, CVS’s 18% growth is much better than Medtronic’s -20% change over the last twelve months. This compares with under 1% growth in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, CVS is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that CVS 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 CVS Health vs. MedtronicWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. CVS’ Revenue Growth Has Been Stronger Over The Recent Years

  • Both companies posted sales growth over the last twelve months. Still, Medtronic’s revenue growth of 14% is higher than 9% for CVS.
  • Looking at a longer time frame, CVS’ sales grew at an average growth rate of 15% to $282 billion in 2021, compared to $195 billion in 2018, while Medtronic’s sales grew at an average growth rate of 0.3% to $30.1 billion in 2021, compared to around $30.0 billion in 2018.
  • CVS’ revenue growth over the recent years was driven by increased demand for Covid-19 testing and vaccine administration. The Aetna acquisition bolstered CVS’ sales in 2019.
  • 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 the 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 CVS Health Revenue and Medtronic Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, CVS’s revenue is expected to grow faster than 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 10.6% for CVS, 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 Comes With Lower Risk

  • Medtronic’s operating margin of 19.6% over the last twelve-month period is much better than 5.2% for CVS.
  • This compares with 25.2% and 5.8% figures seen in 2019, before the pandemic, respectively.
  • Medtronic’s free cash flow margin of 22.1% is also better than 6.3% for CVS.
  • Our CVS Health Operating Income and Medtronic Operating Income dashboards have more details.
  • Looking at financial risk, CVS’ 45% debt as a percentage of equity is higher than 18% for Medtronic, while its 5% cash as a percentage of assets is lower than 12% for the latter, implying that Medtronic has a better debt position as well as more cash cushion.

3. The Net of It All

  • We see that CVS Health has demonstrated better revenue growth, and it is available at a comparatively lower valuation.  On the other hand, Medtronic is more profitable, and it offers lower risk, primarily explaining the difference in the valuation of the two companies.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe CVS is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for CVS and Medtronic over the next three years and points to an expected return of 28% for CVS over this period vs. a 6% expected return for MDT stock, implying that investors are better off buying CVS over MDT, based on Trefis Machine Learning analysis – CVS Health vs. Medtronic – which also provides more details on how we arrive at these numbers.

While CVS 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 May 2022
MTD [1]
YTD [1]
Total [2]
CVS Return 0% -7% 22%
MDT Return -1% 0% 45%
S&P 500 Return 1% -12% 87%
Trefis Multi-Strategy Portfolio 2% -15% 233%

[1] Month-to-date and year-to-date as of 5/4/2022
[2] Cumulative total returns since the end of 2016

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