Medtronic: Improved Guidance, Historically Cheap P/E, Yield Reaches 3.5%

Summary:

• Dividend aristocrats underperforming the S&P 500 by more than 10 percentage points in 2023.
• Medtronic, a major aristocrat, has a low P/E ratio, high yield, and potential earnings growth.
• Positive signs of top-line growth and outperformance suggest recent stock price decline may be overdone.
• I highlight key price levels to watch as MDT looks to bottom.

Dividend aristocrats have had a tough 2023. While the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is about flat on the year, it is underperforming the SPX by more than 10 percentage points. That came after a strong 2022, though. Big picture, alpha has been negative going back 4 years, leaving the factor in the dust compared to the broad market.

One major aristocrat, Medtronic (NYSE:MDT), features a historically low P/E multiple, high yield, and a potential earnings inflection. While technical momentum is weak, the chart offers some hope for the bulls.

Dividend Aristocrats Lagging the S&P 500

According to Bank of America Global Research, Medtronic is a medical technology firm that develops, manufactures, and markets medical devices and technologies to hospitals, physicians, clinicians, and patients. The company operates in four business segments: Cardiac & Vascular Group, Medical Surgical, Neuroscience, and Diabetes.

The Ireland-based $105 billion market cap Health Care Equipment industry company within the Health Care sector trades at a high 29.1 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.5% forward dividend yield. Ahead of earnings in November, shares trade with low implied volatility of just 20% while MDT’s short interest is also modest at 0.5%.

Back in August, Medtronic reported a solid earnings beat. Operating EPS verified at $1.20, a 9-cent beat, while quarterly revenue of $7.7 billion was a 4.5% year-over-year jump and a $140 million beat. The management team also raised its FY 2024 organic revenue growth outlook to 4.5% from the previous range of 4-4.5% as well as a bump up in earnings guidance.

In general, there were positive signs with top-line growth and a strong outperformance in its margin figures. New products like 780G, EV-ICD, and Intellis are expected to drive a sequential revenue acceleration on this somewhat cheap stock. Unfortunately, China is a sore spot – delays in provincial value-based pricing (VBP) have been a challenge, but the management team hopes that will turn around in FY 2025. Overall, though, business-wide outperformance suggests the recent stock price decline may be overdone.

Q1 2024: Guidance Boost

Strong Top-Line Growth Across Segments

Key risks for Medtronic include slower-than-expected growth in new products, challenges with its pipeline, higher competition, and weakness in VBP in China.

On valuation, analysts at BofA see earnings having fallen 6% in its FY 2023 that just wrapped up with continued weakness in 2024. Outer-year EPS estimates turn more sanguine, and the Bloomberg consensus forecast is about on par with what BofA projects. Dividends, meanwhile, are seen as rising at a steady clip, making for a better yield compared to previous quarters. MDT’s operating earnings multiple has turned much better. Recall just two years ago that the firm’s forward non-GAAP P/E was lofty near 24 – it’s close to 15 today. Its yield is also just about at all-time highs while free cash flow remains steady.

Medtronic: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

MDT: Historically Attractive P/E Ratio

MDT: Near-Record-High Dividend Yield

If we assign an 18 multiple on next 12-month EPS of $5.20, then shares should be in the mid-$90s, considerably above the current stock price. I don’t see that much has changed from a valuation perspective since my initial coverage of the stock earlier this year.

MDT: Improved Valuation Metrics, Near-Term Growth Risks

Compared to its peers, MDT features a relatively strong valuation grade while its growth outlook is not so rosy. But consider that profitability should inflect over the coming quarters while its FCF per share, already at $3.34 on a trailing basis, would likely turn up. I assert the stock’s technical momentum is quite weak today, different from the B rating below, but EPS revisions, like many of its peers, have been robust lately.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q2 2024 earnings date of Tuesday, November 21 BMO. Before that, I have my eyes on a pair of potential volatility catalysts: (1) the MDT management team’s speaking event at the European Association for the Study of Diabetes (EASD) 2023 from October 2 to 6, and (2) MDT’s shareholder meeting on Thursday, October 19.

Corporate Event Risk Calendar

The Technical Take

I was admittedly bullish on MDT stock in early Q1. I highlighted some inklings that the brutal 45% drawdown off the late 2021 peak had run its course. Indeed, shares found a floor in the mid-$70s with a successful retest in March. A rally then ensued to early May, with the stock jumping about 20% to the low $90s. A double top was put in over the summer, however. Notice in the chart below that sellers appear to have a stronghold in the $91 to $92 area, snapping what could have been a bullish rounded bottom pattern.

I now see critical long-term support in the $75 to $77 zone – a break of that range could portend a bearish measured move price objective to the upper $50s based on the trading range over the past year. For now, long with a stop under $72 (the March 2020 low) looks to be a favorable risk/reward play. With a bearish death cross taking place (in which the shorter-term 50-day moving average crosses below the longer-term 200dma), the bears may have a near-term grip on shares. Moreover, the 200dma is flat after having been negatively sloped for about 18 months.

Overall, the risk/reward setup today is actually favorable, and a rally above the aforementioned moving averages would help support the case for a near-term uptrend resuming.

MDT: Downtrend Halted, Trading Range Has Emerged

The Bottom Line

I reiterate my buy rating on MDT stock. Shares appear cheap and the technical situation has some rays of hope from a risk/reward point of view.

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