What’s Next For Medtronic Stock After An Upbeat Q3?

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Medtronic (NYSE: MDT) recently reported its Q3 fiscal 2024 results (fiscal ends in April), with revenues and earnings beating the street estimates. The company reported revenue of $8.1 billion and adjusted earnings of $1.30 per share compared to the consensus estimates of $7.9 billion and $1.26, respectively. The company continued to benefit from increased adoption of its new products, including MiniMed 780G and Evolut FX, among others. In this note, we discuss Medtronic’s stock performance, key takeaways from its recent results, and valuation.

MDT stock has faced a notable decline of 25% from levels of $115 in early January 2021 to around $85 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. Notably, MDT stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -12% in 2021, -25% in 2022, and 6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 like it has some room for growth. We estimate Medtronic’s valuation to be $96 per share, reflecting an upside of over 15% from its current level of $83. Our forecast is based on a 19x P/E multiple for MDT and expected earnings of $5.19 on a per-share and adjusted basis for fiscal 2024. The 19x P/E ratio compares with the stock’s average over the last four years.

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 $8.1 billion in Q3 was up 5% y-o-y, partly due to higher sales of its MiniMed 780G systems, which anticipates and automatically adjusts insulin delivery. Looking at segments, the Neuroscience segment saw 4.8% growth, Cardiovascular sales were up 6.1%, Medical Surgical up 3.9%, and Diabetes sales were up 12.3% year-over-year. Medtronic’s adjusted operating margin slid 70 bps to 25.2% in Q3. This resulted in the bottom line of $1.30 on an adjusted basis, aligning with the figure it reported in the prior-year quarter.

Looking forward, Medtronic expects its sales to rise between 4.75% and 5%, and its adjusted earnings to be in the range of $5.19 and $5.21 in fiscal 2024. This reflects an upward revision from its prior guidance of 4.75% sales growth and EPS range of $5.13 to $5.19.

At its current levels, MDT stock is trading at 16x its 2024 expected earnings of $5.19 per share. We think MDT stock will likely see this gap in the valuation multiple narrow toward its historical average of 19x, as the company benefits from market share gains for its new products. The company is seeing increased adoption for its Evolut valve platform, 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 Feb 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 MDT Return -4% 8% 18%
 S&P 500 Return 5% 32% 126%
 Trefis Reinforced Value Portfolio 4% 43% 633%

[1] Returns as of 2/28/2024
[2] Cumulative total returns since the end of 2016

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