Medtronic’s beaten-down stock is a bargain for investors seeking a stable grower in a scary market.
Illustration by Richard Mia
Not a lot has gone right for medical-device giant Medtronic recently. But this year could make investors in the normally no-drama, high-performing company feel a whole lot better.
Like the Delta variant before it, Omicron has hurt demand for hospital elective procedures—the kind that Medtronic (ticker: MDT) makes devices for—while the company has also suffered setbacks with new products and regulatory problems. Its failure to provide updates for investors on those issues at the J.P. Morgan Healthcare Conference in January resulted in downgrades from formerly bullish analysts at BTIG and Piper Sandler.
All told, Medtronic stock, at a recent $103.59, with a $139 billion market cap, has dropped 14% over the past three months, versus the S&P 500 index’s 1.4% dip over the same period.
Medtronic’s problems, however, are fixable and temporary in nature, and when they pass, the company should regain its ability to churn out steady earnings growth. In the meantime, Medtronic has a dividend that will likely keep growing. With the stock beaten down, Medtronic could be a bargain for investors seeking a stable grower in a rocky market.
The Covid-19 era has been tough on medical-device companies. Periodic waves in case counts—even pre-Omicron—have delayed back and heart surgeries, among other procedures, as hospitals have prioritized Covid care. Those pauses have reduced sales forecasts—Medtronic’s medical-surgery business accounts for 29% of its $30 billion sales—and dented their stocks.
On Nov. 23, Medtronic reported a fiscal second-quarter profit of $1.32 a share, beating forecasts of $1.29. But its $7.85 billion in sales missed expectations of $7.96 billion, and it offered below-consensus third-quarter guidance. It wasn’t the only company to struggle. Boston Scientific (BSX) missed estimates for its medical-surgical business in the September quarter when it reported sales of $917 million, below expectations of $934 million.
“The main thing is Covid,” says Needham analyst Mike Matson. “Hospitals are at capacity.”
As Omicron eases, sales are likely to snap back. Analysts expect Medtronic to grow sales by 6%, to $33.4 billion, in 2022, while earnings could rise by 14%. Stifel analyst Rick Wise says that while profit forecasts could come down a tick to start the year, the Covid-related challenge is a short-term blip. “[Improved] fundamental performance could translate to better-than-expected revenue growth, earnings performance,” he writes.
Medtronic can’t blame all its problems on Covid. On Oct. 15, the company announced that a clinical trial for a technology designed to lower blood pressure, known as renal denervation, showed inconclusive results, meaning it will have to continue running the trial, putting billions of expected annual sales at risk.
On Dec. 15, the company announced it had received a warning letter from the Food and Drug Administration regarding product-safety issues at its Northridge, Calif., plant that makes its popular MiniMed insulin pumps, sending its stock down as much as 11%. Medtronic could see a more than $100 million hit to diabetes-equipment sales in 2022, according to Morgan Stanley analyst Cecilia Furlong.
On the fiscal second-quarter conference, Medtronic CEO Geoffrey Martha said he was “confident” that the company would eventually get its renal product approved for sale. As for the FDA letter, Morgan Stanley’s Furlong sees a resolution in about a year.
In the meantime, Medtronic stock is cheap. Shares trade at 17.4 times forward earnings estimates, 14% lower than the S&P 500’s 20.3 times. Historically, Medtronic has traded at a similar multiple to the S&P 500.
Many analysts see the company’s valuation heading higher. Stifel’s Wise values the stock at 22.5 times 2022 earnings, while Citigroup analyst Joanne Wuensch has the stock trading up to 20 times. Earning a higher multiple, however, will require Medtronic’s underperforming product segments, like medical surgery, to recover. “In the short term, it’s going to be tough, but beyond 12 months, people will start to see the multiple go back up if things go right,” Needham’s Matson says.
In the meantime, Medtronic has some $10.7 billion in cash, some of which could be returned to shareholders to soften the blow if near-term profits disappoint. It has net debt of $14.9 billion—or 1.5 times earnings before interest, taxes, depreciation, and amortization, or Ebitda—making it relatively easy to make its interest payments and continue to pay its dividend, which could rise to $2.52 per share in 2022, up from $2.42 in 2021, and a 2.4% yield, according to FactSet. “The dividend is very safe” says BTIG analyst Ryan Zimmerman, citing Medtronic’s good balance sheet. He downgraded the stock to Neutral from Buy in January.
And Medtronic has enough cash left over for acquisitions. On Jan. 10, the company agreed to acquire privately held Affera, a maker of cardiac equipment for patients with atrial fibrillation, or irregular heartbeats, for $925 million. Though not everyone is a fan of the deal, it will broaden Medtronic’s product portfolio by supplementing the company’s cardiac mapping and navigation product, used in the surgical treatment of atrial fibrillation.
If all goes well, 2022 could be a bounceback year for the stock. At 20 times 2023 earnings forecasts of $6.46, the stock would be up 25%. Add in the dividend payments, and the total return would be close to 30%.
That’s a healthy gain, even if it requires a little patience.
Write to Jacob Sonenshine at [email protected]
