Medtronic Stock Is A Better Pick Over This Pharmaceuticals Bellwether

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We believe Medtronic stock  (NYSE: MDT) is currently a better pick than Johnson & Johnson stock (NYSE: JNJ), given its better prospects. Although Medtronic is trading at a comparatively lower valuation of 3.5x trailing revenues vs. 4.5x for J&J, this gap in the valuation is largely justified given J&J’s superior profitability and lower financial risk, as discussed below.

If we look at stock returns, JNJ, with a 3% fall this year, has fared better than a 20% decline for MDT stock and -23% returns for the broader S&P 500 index. JNJ’s outperformance can partly be attributed to its recently announced $5 billion share buyback plan, reaffirming its full-year earnings outlook of $10.70 at the mid-point of its range. There is more to the comparison, and in the sections below, we discuss why we believe MDT stock will offer better returns than JNJ 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 Medtronic vs. Johnson & JohnsonWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. J&J’s Revenue Growth Is Better

  • J&J’s revenue growth of 7.2% over the last twelve months is much better than -1.7% for Medtronic.
  • Even if we look at a longer time frame, J&J’s sales growth has been better. It rose at an average annual growth rate of 4.9% to $93.8 billion in 2021, compared to $81.6 billion in 2018, while Medtronic saw its revenue rise at an average annual rate of just 1.3% to $31.7 billion in fiscal 2022 (Medtronic’s fiscal ends in April), compared to $30.0 billion in 2018.
  • While J&J’s medical devices business faced headwinds in 2020 due to the pandemic’s impact, it rebounded in 2021.
  • The pharmaceuticals segment saw a 14% rise in 2021 sales, and the medical devices segment sales were up 18%. The strong performance from both segments is expected to continue going forward.
  • The company’s pharmaceuticals business is seeing strong growth led by market share gains for its cancer drugs, Imbruvica and Darzalex, and immunology drugs, Stelara and Tremfya.
  • Medtronic’s sales were also 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 Johnson & Johnson Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, J&J revenue is expected to grow faster than Medtronic’s 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 1.6% for Medtronic, compared to a 3.6% CAGR for J&J, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are 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 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. J&J Is More Profitable, And It Comes With Lower Risk

  • J&J’s operating margin of 23.9% over the last twelve-month period is slightly better than 19.9% for Medtronic.
  • This compares with 24.5% and 25.2% figures seen in 2019, before the pandemic, respectively.
  • J&J’s free cash flow margin of 24.7% is also better than 23.0% for Medtronic.
  • Our Medtronic Operating Income and Johnson & Johnson Operating Income dashboards have more details.
  • Looking at financial risk, J&J fares better. Its 15.5% debt as a percentage of equity is lower than 21.2% for Medtronic, while its 13.3% cash as a percentage of assets is higher than 9.9% for the latter, implying that J&J has a better debt position and more cash cushion.

3. The Net of It All

  • We see that J&J has demonstrated better revenue growth, is more profitable, has a better debt position, and has more cash cushion. On the other hand, Medtronic is available at a comparatively lower valuation.
  • Going by historical performance, J&J appears to be a clear winner among the two. But will it continue to outperform in the coming years? We don’t think so.
  • 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 J&J over the next three years and points to an expected return of 14% for Medtronic over this period vs. an 8% expected return for J&J, based on Trefis Machine Learning analysis – Medtronic vs. Johnson & Johnson – which also provides more details on how we arrive at these numbers.

While MDT stock looks like a better pick over JNJ stock, it is helpful to see how Medtronic’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for UnitedHealth Group vs. Pool Corporation.

Given the higher inflation and the Fed raising interest rates, among other factors, MDT stock has fallen 20% this year. Can it drop more from here? See how low Medtronic stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

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 Sep 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
MDT Return -6% -20% 16%
JNJ Return 3% -3% 45%
S&P 500 Return -7% -23% 65%
Trefis Multi-Strategy Portfolio -11% -25% 198%

[1] Month-to-date and year-to-date as of 9/26/2022
[2] Cumulative total returns since the end of 2016

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