We think that Medtronic stock (NYSE: MDT) is currently a better pick than Eli Lilly stock (NYSE: LLY), given Medtronic’s better prospects and comparatively lower valuation. MDT stock trades at a P/S ratio of 4.4x, compared to 9.7x for LLY stock. The gap in the valuation of these two companies can be attributed to better revenue growth and higher profitability of Eli Lilly. Although both the companies are in different businesses, we compare them due to their similar revenue base. While both companies saw a rise in revenue in recent years, Eli Lilly’s growth has been better.
Looking at stock returns, Eli Lilly’s 55% growth is much better than Medtronic’s -16% change over the last twelve months. This compares with a -1% change in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Medtronic is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe MDT stock will offer better returns than LLY 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 Medtronic vs. Eli Lilly: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Eli Lilly’s Revenue Growth Has Been Stronger Over The Recent Years
- Both companies posted sales growth over the last twelve months. Still, Eli Lilly’s revenue growth of 15% is marginally higher than 14% for Medtronic.
- Looking at a longer time frame, Eli Lilly’s sales grew at an average growth rate of 9.7% to $28.3 billion in 2021, compared to $21.5 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.
- Eli Lilly’s revenue growth has been driven by continued market share gains for drugs, such as Trulicity, Verzenio, and Olumiant, and its Covid-19 treatment.
- It also has a robust product cycle, including Alzheimer’s treatment – Donanemab, and diabetes drug – Tirzepatide. The combined peak revenue for these drugs alone is pegged at over $11 billion. The strong gains for LLY stock mentioned earlier in this article can be attributed to investor optimism for Donanemab.
- 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 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 Medtronic Revenue and Eli Lilly Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, both the companies are expected to see their revenue expand at a similar pace 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 2.4% for Eli Lilly, 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.
2. Eli Lilly Is More Profitable, And It Has A Better Debt Position
- Eli Lilly’s operating margin of 21.1% over the last twelve-month period is much better than 10.3% for Medtronic.
- This compares with 21.8% and 20.5% figures seen in 2019, before the pandemic, respectively.
- Eli Lilly’s free cash flow margin of 25.6% is also better than 22.1% for Medtronic.
- Our Medtronic Operating Income and Eli Lilly Operating Income dashboards have more details.
- Looking at financial risk, Medtronic’s 35% debt as a percentage of equity is higher than 12% for Eli Lilly, while its 12% cash as a percentage of assets is higher than 8% for the latter, implying that Eli Lilly has a better debt position and Medtronic has more cash cushion.
3. The Net of It All
- We see that Eli Lilly has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, Medtronic is available at a comparatively lower valuation and has a higher cash cushion.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Medtronic is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for Medtronic and Eli Lilly over the next three years and points to an expected return of 5% for Medtronic over this period vs. a -8% expected return for Eli Lilly, based on Trefis Machine Learning analysis – Medtronic vs. Eli Lilly – which also provides more details on how we arrive at these numbers. Note that LLY stock has already seen a large rally on the optimism around its late-stage pipeline drugs.
- Although this implies that MDT is a better pick over LLY, it still doesn’t look like a good investment with just 5% returns over three years. However, we believe that the returns for MDT stock can be much higher, especially if it sees the MiniMed 780G approval in the U.S. In fact, we maintain our Medtronic valuation of $129 per share in the long run, reflecting a significant 25% premium to the current market price of $103, compared to an expected 5% return over the three-year period, based on our revenue forecast and P/S scenarios considered in the near term.
While MDT stock may outperform LLY, 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.
|S&P 500 Return||-1%||-14%||83%|
|Trefis Multi-Strategy Portfolio||-3%||-19%||217%|
 Month-to-date and year-to-date as of 5/18/2022
 Cumulative total returns since the end of 2016