Should You Pick Medtronic Stock At $80 After An Upbeat Q2?

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Medtronic (NYSE: MDT) recently reported its Q2 fiscal 2024 results (fiscal ends in April), with revenues and earnings beating our estimates, and we believe that MDT stock is undervalued, as discussed below. The company reported revenue of $8.0 billion and adjusted earnings of $1.25 per share compared to our estimates of $7.8 billion in sales and $1.17 profit per share. In this note, we discuss Medtronic’s stock performance, key takeaways from its recent results, and valuation.

MDT stock has suffered a sharp decline of 30% from levels of $115 in early January 2021 to around $80 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Notably, MDT stock has underperformed the broader market in each of the last three years. Returns for the stock were -12% in 2021, -25% in 2022, and 1% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that MDT underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector, including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT.  In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MDT face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, MDT stock looks undervalued. We estimate Medtronic’s valuation to be $96 per share, reflecting an upside of over 20% from its current level of $79. Our forecast is based on an 18x P/E multiple for MDT and expected earnings of $5.19 on a per-share and adjusted basis for fiscal 2024. The 18x P/E ratio compares with the stock’s last three-year average of 20x. The company raised its earnings outlook to be in the range of $5.13 and $5.19 (versus the $5.08 and $5.16 range earlier).

Medtronic’s revenue of $8.0 billion in Q2 was up 5% y-o-y, primarily due to higher sales of its diabetes products. The diabetes segment sales were up 10% due to the increased adoption of its MiniMed 780G system, which anticipates and automatically adjusts insulin delivery. The company’s other segments also performed well, with cardiovascular sales rising 6%, neuroscience up 5%, and medical-surgical sales up 7%. Medtronic raised its organic sales outlook to 4.75% growth in fiscal 2024 versus its prior guidance of 4.5% growth.

Medtronic’s adjusted earnings of $1.67 billion in Q2 reflected a 3% fall from its $1.73 billion profit figure in the prior-year quarter. This can partly be attributed to $793 million in certain tax adjustments in the prior year quarter compared to $176 million in Q2’24. Adjusted EPS of $1.25 was slightly lower than $1.30 in the prior-year quarter.

MDT stock is trading at 15x its 2024 expected earnings of $5.19 per share, compared to its last three-year average of 20x. We believe MDT stock will likely see this gap in the valuation multiple narrow toward its historical average as the company benefits from market share gains for its new products, including the Micra AV pacemaker and Onyx Frontier drug-eluting stent. It should also see continued strength in cardiac products. The increased adoption of its MiniMed 780G insulin system in the U.S. and international markets will further bolster its overall performance.

While MDT stock looks undervalued, 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.

 Returns Nov 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 MDT Return 11% 1% 10%
 S&P 500 Return 8% 18% 103%
 Trefis Reinforced Value Portfolio 7% 26% 548%

[1] Month-to-date and year-to-date as of 11/22/2023
[2] Cumulative total returns since the end of 2016

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