Will Medtronic Stock See Higher Levels After An Upbeat Q3?

MDT: Medtronic logo

Medtronic stock (NYSE: MDT) has risen 4% in a month, compared with -0.6% returns for the broader S&P500 index. Medtronic recently reported its Q3FY23 results, with revenue and earnings falling above our estimates. Despite its recent rise, we find MDT stock has more room for growth, as discussed below.

Medtronic’s revenue of $7.7 billion reflected a 0.5% y-o-y decline, slightly above our $7.6 billion estimate. While forex headwinds impacted the overall sales growth, its Neuroscience segment saw 4.9% growth, and cardiovascular sales were up 1.0%. The company’s earnings of $1.30 on a per share and adjusted basis was down 4% y-o-y, given the lower sales and about 200 bps fall in adjusted operating margin.

Given the upbeat results, the company raised its full-year organic sales growth forecast to be between 4.5% and 5%, compared to its prior guidance of 3.5% and 4%. It also narrowed its earnings outlook to $5.28 to $5.30 on a per share and adjusted basis, vs. its previous guided range of $5.25 and $5.30. We have updated our model to reflect the latest quarterly results. We forecast revenue of $30.6 billion, reflecting a 3.5% y-o-y decline on a reported basis, and adjusted earnings of $5.29 per share, in line with the company’s provided guidance.

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We estimate Medtronic’s Valuation to be around $97 per share, 14% above the current market price of $85. This represents an 18x P/E multiple based on its expected EPS of $5.29 in fiscal 2023, compared to the last three-year average of 23x. We have lowered our P/E forecast, primarily due to an anticipated decline in earnings in the near term. Furthermore, fiscal 2024 will likely be challenging for Medtronic, with pressure on its gross and operating margins amid high costs. Also, the high-interest rate environment and the economy expected to go into recession doesn’t bode well for the company. Still, at its current valuation of $85, MDT appears to have more room for growth, as it is trading at a low multiple of 16x forward earnings compared to its historical average.

While MDT stock looks like it can gain more, the Covid-19 crisis and recent market volatility have 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 Becton Dickinson vs. Amerco.

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 Feb 2023
MTD [1]
YTD [1]
Total [2]
 MDT Return 2% 10% 20%
 S&P 500 Return -2% 4% 79%
 Trefis Multi-Strategy Portfolio -4% 7% 237%

[1] Month-to-date and year-to-date as of 2/22/2023
[2] Cumulative total returns since the end of 2016

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