Will Medtronic Stock See Higher Levels After An Upbeat Q3?

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.

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.

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