• Medtronic remains a “Buy” due to its undervalued stock, recent product launches, and resolved supply chain issues, despite underperformance over the past 7 months.
• The company posted solid Q2 results with revenue up 5.25% YoY and expects organic revenue growth of 4.75%-5% for fiscal 2025.
• Medtronic’s strategic acquisitions and focus on innovation and efficiency are expected to drive sustainable growth and improve margins over the next 1-3 years.
• As the newly launched products and less supply pressures give a great chance for better margins in the next few years, I believe that MDT should eventually reprice higher.
• I remain bullish on this stock and reiterate my “Buy” rating, hoping for a better 2025.

Intro & Thesis

One of the largest medical technology and solution providers in the world – Medtronic plc (NYSE:MDT) – offers several hundred innovative solutions as its products are targeted at cardiac rhythm management, spinal and surgical

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MDT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Medtronic remains a buy due to its attractive valuation and steady EPS growth, despite recent sector-wide selling pressure and modest losses.
• Q2 results beat Wall Street expectations, with revenue up 5% year-over-year, and management raised FY 2025 revenue and earnings estimates.
• Key risks include supply chain issues, competition, policy changes, and currency fluctuations, but MDT’s free cash flow yield and technical support levels are strong.
• Resistance is seen near $92-93, with support between $82-83.55, indicating a potential upside if key resistance levels are breached.

The Health Care sector has taken it on the chin in the past month. President-elect Trump’s win, and subsequent pick to lead the Department of Health and Human Services (HHS), was met with selling pressure in November across much of the pharma and life science space. Shares of Medtronic (NYSE:MDT) endured some pain, but losses have been relatively modest compared to other companies seen as in RFK Jr.’s crosshairs.

With MDT up 3% since my August analysis, I still see the Health Care Equipment industry stock as a buy on valuation, and a key resistance level has emerged on the chart heading into 2025. I reiterate a buy rating. The dividend aristocrat now yields 3.2%.

Health Care Sector ETF (XLV) Falls to Multi-Year Relative Lows Versus the S&P 500 (SPY)

Back in November, MDT reported a solid set of quarterly results. Q2 non-GAAP EPS of $1.26 topped the Wall Street consensus forecast by a penny while revenue of $8.4 billion, up 5% from the same period a year earlier, was a material $130 million beat. The management team raised its FY 2025 revenue growth and earnings guidance, but MDT still fell by 3% in the session that followed.

The company now expects top-line growth in the 4.75%-5% range, a hike of 25 basis points from the last update. As for the new earnings estimate, an operating EPS range of $5.44 to $5.50 is the internal target, which includes a 5% negative impact from currency movements. The Ireland-based MedTech firm expects EPS growth in the high single digits looking out to the back half of the fiscal year, which helps to support a decent P/E multiple in my view.

Its Cardiac Ablation Solutions’ (CAS) growth was just flat from Q2 of last year due to lingering supply chain issues, but those troubles are seen as having abated as of the end of the reporting period. As Affera production increases (its Afib ablation business), appears on track which should contribute to earnings and its margin going forward.

On the earnings outlook, analysts forecast an EPS acceleration to above 7% in the out year and through 2027 (an increase from less than 5% bottom-line growth in FY 2024). Revenue growth is seen as more stable in the 3% to 6% range for the foreseeable future. Since my previous analysis, there has been a mixed bag of sell-side revisions. Despite the strong Q3 numbers, 11 Wall Street analysts have downgraded their EPS estimates compared to just 9 earnings upgrades.

Still, Medtronic is highly profitable – evidenced by $4.21 of free cash flow per share over the last 12 months, resulting in a free cash flow yield just slightly below 5%.

MDT: Revenue & Earnings Forecasts, EPS Revision Trends

On valuation, since we are about halfway through MDT’s FY 2025, if we assume forward non-GAAP EPS of $5.65 and apply the stock’s 5-year average earnings multiple of 19.3, then shares should trade near $109. While that intrinsic value target is the same as what I estimated in the summer, there may be slight downside risks to the valuation amid uncertainty in the Health Care sector, though MedTech should be less impacted by RFK’s possible policies.

Also, a 7% long-term EPS growth rate would imply a PEG above 2 for the stock, which is above the S&P 500’s average. Of course, MDT has historically traded with a 2.77 PEG.

MDT: An Attractive Valuation

Key risks for Medtronic include disappointing sales from its Symplicity Spyral renal denervation system, slow adoption of its new products, additional supply chain problems, heightened competition in the MedTech space, and policy risks.

Furthermore, additional strength in the US dollar could ding EPS, but currency moves are often transitory and mean reverting.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q3 2025 earnings date of Tuesday, February 18 BMO with a conference call immediately after the numbers hit the tape.

No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

With shares still materially undervalued and with improved guidance from the company’s management, MDT’s chart continues to show potential. Notice in the graph below that the $92 to $93 has emerged as critical resistance. In my previous analysis, I highlighted a downtrend resistance line that, if broken through, could spark a significant upside. Though a breakout took place shortly after my mid-August write-up, the rally stalled at the Q3 2022 and Q2 2023 highs. There have been bouts of selling pressure not too far from $92 in the past 18 months, too.

But take a look at a rising support line that comes into play near $82. With the long-term 200-day moving average in the mid-$80s and ample volume by price down to the mid-$70s, there should be a solid cushion if we see a protracted dip. I also spotted a gap from mid-August that the MDT bulls have thus far defended – that’s an encouraging sign. With a near-term low at $83.55, the bearish RSI divergence may have resolved itself with shares back above the 200 dma.

Overall, resistance is seen between $92 and $93 while support is between $82 and $83.55.

MDT: Resistance Apparent in the Low $90s, Shares Hold Gap-Fill Support

The Bottom Line

I have a buy rating on MDT. I see the stock as fundamentally undervalued with steady EPS growth this year through the ensuing two fiscal years. The chart, meanwhile, has potential with key resistance lying near $93.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Medtronic: Guidance Raised, Solid Dividend, Shares Still A Bargain appeared first on Up2info.com.

• Medtronic plc reported Q2 earnings today, with revenues of $8.4bn, up 5% year-on-year, adjusted EPS of $1.26, supported by a dividend yielding 3.2%.
• Despite consistent mid-single-digit revenue growth and new product launches, Medtronic’s share price remains flat due to unpredictable net income and modest innovation.
• CEO Geoff Martha highlighted strong performance and innovation in key fields such as diabetes and hypertension, but stopped short of providing specific long-term growth guidance, keeping market sentiment lukewarm.
• Medtronic has potential for high single-digit growth and can deliver MDT shareholders value through strategic M&A, consistent new product launches, and steady, if unspectacular growth.

Investment Overview

The medical device giant Medtronic plc (NYSE:MDT) announced its second quarter fiscal results ahead of market open today — so far, the market’s reaction has been lukewarm, with shares down ~3% in early trading, to $85, assigning the company a market cap valuation of $109bn.

First, let’s take a look at some headline figures. Revenues for the quarter were $8.4bn, up 5% year-on-year on an organic basis. Adjusted diluted earnings per share (“EPS”) came to $1.26, up 0.8% year-on-year, or 8% on a constant currency basis.

Operating cash flow came to $1.9bn, free cash flow, $1bn, net income, $2.33bn, up from $1.71bn in the prior year period, and current assets were reported as $22.44bn, with $1.4bn cash and $6.6bn of investments, against $3.72bn of current debt, and $24.6bn of long-term debt. Medtronic pays a quarterly dividend of $0.7, which translates to a current annual yield of 3.2%

Revenues were split between Medtronic’s diabetes franchise, which earned $686m of revenues, up 11% year-on-year, cardiovascular, $3.1bn of revenues, up 6%, neuroscience, $2.45bn, up 7%, and medical surgical, $2.1bn, up 0.7% year-on-year. $4.3bn of total revenues were earned domestically, up 3.3%, and $4.1bn internationally, up 7%.

In terms of guidance, Medtronic is forecasting for organic revenue growth of 4.75%-5%. This is up from the 4.5%-5% guided for in Q1, although thanks to a larger FX impact, implied revenue has been narrowed from $33.5bn-$33.7bn, to $33.5bn-$33.6bn, with EPS of $5.44-$5.5. This implies a forward price to earnings ratio of ~16x, a perfectly respectable metric.

The above table included in Medtronic’s Q2 ’25 earnings presentation breaks down revenue by portfolio and geography, and shows that there were no underperforming / shrinking segments of the business (apart from “other”), which is an encouraging sign. Neuromodulation and diabetes treatment were the best-performing segments, delivering growth of 12.6% and 12.4% respectively.

Overall Picture: A Solid Quarter By A Good Blue-Chip Company — But Not Enough To Reignite Share Price Growth

Medtronic stock trades at more or less the same value today as it did ten years ago, which is not a particularly encouraging statistic for long-term shareholders, albeit the dividend provides some additional income.

On a five-year basis, shares are down 24% (at the time of writing), having achieved their peak value of $134 in August 2021, at the height of the pandemic era. Performance since has been generally poor, with the nadir coming in October last year, when the stock fell <$70 per share. More encouragingly, shares are up 14% on a 12-months basis, and 4% year-to-date.

If we look at Medtronic’s recent income statements, the issue striking at the heart of Medtronic’s underwhelming share price performance becomes apparent — a lack of compelling top-line revenue growth, and a lack of operating income growth. Net income has also been inconsistent, as shown below:

Medtronic’s net income and EPS figures are reminiscent of Forrest Gump’s mother’s box of chocolates — “you never know what you’re going to get.” When the bottom line is unpredictable, the share price is unlikely to grow.

Was there anything in today’s Medtronic earnings that suggests the business is turning a corner?

Medtronic’s Prospects For Growth & Reigniting Shareholder Value

In the earnings call commentary released by Medtronic today, Chairman and CEO Geoff Martha commented that the company had experienced:

yet another quarter of strong results that came in ahead of expectations, and another guidance raise. This makes it eight quarters in a row now of solid, mid-single digit organic revenue growth.

The CEO noted that “We’re delivering durable, mid-single digit revenue growth, which we’ve been doing consistently now for two years,” but also seems to acknowledge the market’s impatience with the incremental pace of growth, adding:

We’ve also been investing to position ourselves in high growth markets. This has led to a wave of recent product approvals across many of our businesses. Look it’s exciting, and it creates a tailwind that this company hasn’t had in a while. We’ve been working hard to put ourselves in a position to win, with revenue growth tailwinds on top of a strong foundation… and now it’s up to us, it’s just up to us to execute and deliver on these opportunities.

In summary, then, Medtronic management is confident of growth, and is poised to deliver. However, it has stopped short of providing any specific detail, for example, guidance for fiscal year 2026, or a long-term compound annual growth (“CAGR”) expectation for the top or bottom line. Thus, it could be accused of hedging its bets somewhat.

What is undeniable is that Medtronic has launched an impressive number of new products across the past year, as shown below:

Cardiac Rhythm and Heart Failure (“CRHF”) accounted for $1.6bn of revenues in Q2, but management estimates — in its January J.P. Morgan (JPM) Healthcare conference presentation — that this is a $8bn market. The CEO told analysts that “we nearly doubled the number of physicians using PulseSelect” in the quarter, and talked up the ability of Sphere-9 to “replace competitors’ mapping and RF catheters, allowing us to increase our revenue per case.”

Medtronic also estimates that diabetes is a >$14bn market opportunity for the company, and encouragingly reported 20% growth in its continuous glucose monitoring (“CGM”) business, thanks to its latest 780G “artificial pancreas” product.

Revenues were up 11% year-on-year. It is encouraging that this market opportunity has not been impacted by the GLP-1 agonist drugs Ozempic and Mounjaro, developed by Novo Nordisk (NVO) and Eli Lilly (LLY) respectively. It is also a positive that that growth is being achieved despite competition from the two other CGM med device giants, Abbott laboratories (ABT), and Dexcom (DXCM). In fact, Medtronic’s CEO told analysts on the earnings call that:

We’re investing heavily in Diabetes to expand manufacturing capacity and advance our robust technology pipeline, including our partnership with Abbott on an integrated sensor. These activities support our strategy to be #1 in the fast-growing AID and Smart MDI space, with a technology ecosystem that is focused on achieving better control with less burden.

Turning to hypertension, Medtronic believes the burden of this disease on the healthcare system is “somewhere between $100 and $200 billion a year,” and believes that its simplicity renal denervation system can target >1bn people worldwide, providing “significant, safe, and sustained blood pressure reductions.”

In summary, there are no shortage of opportunities for Medtronic, who invested $1.37bn into R&D in the first half of fiscal year 2025, about the same as in the equivalent period in 2023.

Analysis: Medtronic’s Innovation Tends To be Incremental

Medtronic’s R&D spending in Q2 was 8.6% of revenues, up from 8.2% in the prior year, but its SG&A spending was 32.9% of sales, up from 32.5% in the prior year.

This highlights one of the key impediments to growth at Medtronic in my view. Its business is based more on execution than innovation. New diseases and conditions do not spring up overnight. Innovation among the products treating existing diseases and conditions tends to be slow also, i.e., new products do not tend to outclass older products and demand immediate replacement of the old with the new.

Within the pharmaceutical industry, a new drug might arrive with a best-in-class safety and efficacy profile that leads to widespread adoption, ten years of patent protection, and double-digit billion revenues. However, this does not tend to happen within the medical device industry.

Take diabetes. CGM’s have been incredible growth drivers for medical device companies. Dexcom’s revenues have grown from ~$400m, to >$4bn in less than ten years, but compare that with e.g., Novo Nordisk’s Ozempic — $3bn in its first full year on the market, and ~$14bn last year.

Medical Device companies simply cannot deliver that kind of surge in revenues. They must market and sell more products, and realize a lower margin on sales — albeit still a competitive one — Medtronic’s net income margin was ~13% in Q2.

Nevertheless, my point is that high single digit growth across a business such as Medtronic’s is difficult to achieve. There are plenty of moving parts and innovation is harder to come by, although that does not mean it isn’t achievable.

The good thing about this company is that it launches new products frequently, simultaneously protecting itself against falling revenues of older products, and staying ahead of the competition. The not so good thing is that “blockbuster” (>$1bn per annum) revenue products are rare, competition is intense, and profit margins “good-but-not-great.”

Concluding Thoughts: Medtronic Deserves A Thumbs Up At The Half-Year Stage — High Single Digit Growth Could Create A Lengthy Bull Run

Medtronic has a low price to sales ratio of >3.5x, and a competitive price to earnings ratio. However, it does not have a product that is guaranteed to become a multi-billion selling one within a few years. Thus, the market may shrug and say, investing in Medtronic means I won’t lose money, but I won’t make much money, either.

That, to me, explains the market’s lukewarm reaction to today’s earnings — the headline news is that peak revenue guidance has been ever-so-slightly narrowed, while EPS guidance is basically flat.

Medtronic seems to be heading in the right direction, however, with eight straight quarters of year-on-year growth. The pace of innovation does seem to be picking up also, which opens up the prospect of continued top-line growth — as management has promised.

The bottom line is the major concern. It has been too flat and/or unpredictable to stimulate share price growth. However, I find myself agreeing with management that with good execution, the company has the product pipeline to grow top and bottom lines faster than the market expects.

There is also cash available for M&A — while Medtronic can’t add billions of revenues to its top line in 2026 organically, it could do with some strategic M&A, so I would look out for news on that front.

Medtronic is active in enough growth markets, in my view, with enough new products supported by a strong core base of products in markets where barriers to entry are high, to deliver a positive outcome for shareholders over time.

To date, AI has, in fact, done very little to impact the global healthcare landscape. AI-driven healthcare is one of the worst performing segments of the stock market. However, it may be able to fuel medical device innovation in a way that it cannot — yet — fuel drug development innovation.

In summary, I believe Medtronic has the tools it needs to deliver high single digit growth to top and bottom lines, and drive decent, relatively derisked, if unspectacular gains for shareholders over the next 2–3 years.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Medtronic Q3 Earnings: A Solid Performance, But Bottom Line Still Needs Fixing appeared first on Up2info.com.

• Medtronic is modestly undervalued based on DCF analysis, but slow revenue growth limits upside potential.
• The company’s diabetes segment lags behind competitors like DexCom and Abbott due to inferior CGM technology.
• Medtronic’s cardiovascular and neuroscience segments show steady mid-single-digit growth annually.
• Recent recalls of insulin pumps may hinder growth in Medtronic’s diabetes business, despite partnerships with Abbott.
• I recommend selling Medtronic stock until it achieves significant innovation or operational improvements to drive revenue growth.

Analysis will often point out that Medtronic (NYSE:MDT) is “undervalued.” It probably is, but not by a lot.

Within the context of an efficient market, there are typically good reasons why securities are priced the way they are. Medtronic, founded in 1949, is a $100 billion-plus health care equipment behemoth, known for its cardiac pacemakers, ablation products, and much more. So this is not a stock that the market would easily and simply “get wrong.” It’s valued as is. Instead of writing an article attempting to prove Medtronic is undervalued and by how much, I am more curious to discover the implicit assumptions the market is making in valuing it.

Yes, my DCF analysis (that discounts the next eight years of projected FCFs to “present value” and adds a terminal value via the perpetuity growth model) dashboard also suggests Medtronic is modestly undervalued. First, let’s look at expectations for 2025.

The FCF margin is implied from projected revenue, MDT’s current P/FCF, and market capitalization. 14.7% is in line with Medtronic’s trailing twelve-month performance.

The revenue estimate for 2025 is the consensus among analysts.

With the baseline FCF established, even 1% constant revenue growth moving forward still suggests Medtronic is undervalued, but by just 9.29%.

Medtronic hasn’t had a problem growing revenues at 1%+ YoY, on average.

But notice the implied annual return for stockholders—just 1.2% and far below the expected annual return of 8.29%. Bump up the annual revenue growth rate to 3%? The annual return climbs to 2.81%, which is still paltry. It’s important to note that equity holders take on risk and expect to be compensated for it. That’s where the CAPM/expected annual return comes from. If you invest in a very risky stock for a year and its return matches the S&P 500, it was a bad investment because you were not fully compensated for the risk. Medtronic is a lower-risk stock with a beta of 0.85, but in order for it to be a worthwhile investment, its returns must exceed its cost of equity. To put it simply, Medtronic is undervalued because their slow growth is failing to generate sufficient returns for equity holders relative to the risk they are taking.

The company can solve this problem in two ways: significantly increase revenue growth, margins, or both. Margin improvements are somewhat limited by the nature of their business. They develop, manufacture, and sell physical products. Gross profit has been ~65% historically. SG&A expenses take up another one-third of revenues. CapEx is in the mid-single digits. There isn’t much you can do to change these figures.

On the revenue growth front, it’s been business as usual. They, seemingly, haven’t been able to find that “next big thing” to boost revenues. For example, Medtronic’s continuous glucose monitoring [CGM] systems have taken a backseat to DexCom (DXCM) and Abbott (ABT) due to poor user experience, innovation, and regulatory issues. Abbott’s FreeStyle CGM delivered $1.6 billion in Q3 2024 alone. In the meantime, Medtronic’s entire diabetes portfolio generated just $647 million in Q3. Imagine if Medtronic rose to the occasion in this multi-billion-dollar market expected to eclipse $30 billion by 2032. Its stock probably wouldn’t be “undervalued.”

In Q2 (or fiscal Q1 2025 for Medtronic), there were signs of encouragement. Revenue came in at $7.92 billion, beating estimates by $18 million. This represented 2.77% YoY growth. Cash from operations totaled $986 million—lower than typical.

Capital expenditures were higher than typical—at $520 million. This resulted in FCF of $466 million, or only 5.9% of revenues.

So, I wouldn’t read much into Medtronic’s quarter-to-quarter differences in FCF margin.

The key question for investors remains: where will the revenue growth come from?

Medtronic reports revenues from their four major segments: cardiovascular (traditionally their largest segment), medical-surgical, neuroscience (e.g., cranial and spinal technologies), and diabetes. Due to fierce competition and a lack of edge in medical-surgical, revenue growth has stalled. Their cardiovascular segment remains strong, growing in the mid-single digits YoY. Neuroscience sports similar growth rates to cardiovascular. Surprisingly, and what has probably sparked the stock’s 29% 1Y rally, their diabetes segment is showing signs of life, growing ~12% YoY. Medtronic highlights their MiniMed 780G system, an automated insulin delivery system designed to improve glucose control for patients with diabetes. This device automates insulin delivery with advanced algorithms based on CGM data (the Guardian Sensor 3). This is a smaller and different market from the CGM that is popular among people with type 2 diabetes who may or may not require insulin injections. Within it, Medtronic competes with Tandem (TNDM) and Insulet (PODD). In August, Abbott announced its intention to integrate its CGM with Medtronic’s insulin pumps. This was a pretty important development in this space and caused some volatility in Tandem’s and DexCom’s stocks. Earlier this month, Medtronic voluntarily recalled all MiniMed 600 and 700 series insulin pumps due to reports of shortened battery life, which could be linked to hyperglycemia and diabetic ketoacidosis cases. The latter is a severe and potentially fatal condition that affects people with type 1 diabetes. The recall is classified as a Class I, which is the most serious type of recall. Subsequently, this could increase scrutiny of Medtronic from both regulators and users.

Medtronic reports Q3 (fiscal Q2) earnings on 11/19. The revenue estimate is $8.28 billion, while the EPS GAAP estimate is $0.94. Investors should pay particular attention to how the MiniMed recall is impacting their diabetes segment revenue.

Financial Health

As of July 26, Medtronic reported having $1.311 billion in cash and cash equivalents. Short-term investments totaled $6.532 billion. Total current assets were $21.947 billion, while total current liabilities were $10.287 billion. This indicates a current ratio of approximately 2, suggesting that Medtronic has sufficient liquidity to cover its short-term obligations. Medtronic does owe $26.26 billion in long-term debt.

Here’s a look at some key trends during the past few years:

MDT Stock: Undervalued but Trapped in Slow Growth

In conclusion, just when things appear to be heating up in one of their key segments, that has, largely, been a disappointment due to their underperformance in the CGM market; the devices that were driving growth get recalled. Yes, it’s the battery. It’s fixable. But this doesn’t bode well for its future performance on the market. Fortunately for Medtronic, they have dozens of prospects outside of their insulin pumps and a considerable moat in cardiac devices. Make no mistake about it, while Medtronic is a solid company, its stock has been another story. In the last ten years, the return has been only 33%. If you had invested in the S&P 500 during the same time period, you would have received 197% returns and could have slept better at night.

Indeed, according to my dashboard, assuming FCF margins remain the same, Medtronic will have to grow revenues at a rate of 7% and merit a higher P/FCF (which should theoretically adjust to the upside if revenue growth improves) for its annual returns to exceed expected annual returns (8.29%).

Until this happens, Medtronic will likely remain undervalued, and its stock will continue to underperform (“sell“).

Risks to my sell recommendation include operational efficiencies that significantly increase profit margins, outperformance in one of their key segments, or successful innovation in a new area such as CGM or robotic surgery. Furthermore, if Medtronic can resolve the recall issue and restore confidence in its diabetes business, there may be significant upside in that segment.

Appendix

Note regarding dividend consideration:

When I estimate returns in my DCF model, the focus is on projected FCF and their present value. The stock price and annual return are driven by the company’s ability to generate FCF over time, independent of dividends. Remember that dividends are simply a distribution of profits. They do not influence the company’s intrinsic value, which is derived from cash flows. So, dividends don’t impact the estimated annual returns or the company’s valuation because my DCF framework already assumes that all FCF is reinvested into the business or returned to shareholders in other forms.

To put it simply, dividends are a use of FCF rather than a source of value themselves.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article is intended to provide informational content and should not be viewed as an exhaustive analysis of the featured company. It should not be interpreted as personalized investment advice with regard to "Buy/Sell/Hold/Short/Long" recommendations. The predictions and opinions presented are based on the author's analysis and reflect a probabilistic approach, not absolute certainty. Efforts have been made to ensure the information's accuracy, but inadvertent errors may occur. Readers are advised to independently verify the information and conduct their own research. Investing in stocks involves inherent volatility, risk, and speculative elements. Before making any investment decisions, it is crucial for readers to conduct thorough research and assess their financial circumstances. The author is not liable for any financial losses incurred as a result of using or relying on the content of this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Medtronic: Undervalued But Trapped In Slow Growth (Rating Downgrade) appeared first on Up2info.com.

• Medtronic remains an attractive investment due to its diversified revenue streams, robust product pipeline and improving margins.
• MDT’s growth is driven by strong performance in Neuroscience, Cardiovascular, and Diabetes care, with significant international revenue growth and a promising product pipeline.
• Trading below its historical valuation, MDT offers a compelling opportunity for conservative investors seeking quality at a reasonably low price.

Navigating this market can be a tricky endeavor. For one thing, there is plenty of interest rate uncertainty given the Fed’s delicate balancing act of controlling inflation without sinking the economy into a recession.

Most recently, the recently strong September jobs report gave economists plenty to cheer for, but at the same time, throws a wrench in the thesis that interest rates may be materially cut in the near term. Plus, conflict in the Middle East further exacerbates inflationary pressures driven by volatility in oil prices.

As such, investors may be well-served by remaining conservative in their approach by picking companies with strong balance sheets and durable business models at below-average prices. This brings me to Medtronic (NYSE:MDT), which I last covered in July, highlighting its undervaluation, strong operating performance and new product opportunities.

MDT has done well for investors since my last piece, producing a 14% total return, far outpacing the 2.5% rise in the S&P 500 (SPY) over the same timeframe. In this article, I revisit MDT including recent business performance and discuss why it remains a good bargain for income and total return potential, so let’s get started!

Why MDT?

Medtronic is a healthcare technology company with products that serve 70 different health conditions and a presence in 150 countries. Its products include cardiac devices, insulin pumps, surgical tools and robots, and patient monitoring systems, among others.

MDT’s revenues are well-diversified by segment, with roughly an even mix between Med/Surgical, Neuroscience, and Cardiovascular, with the balance going to Diabetes care. As shown below, slightly over half of revenues comes from the U.S. with the rest coming from International.

MDT continues to make good strides in growing since the last time I visited the stock. This is reflected by a respectable 5.3% YoY organic revenue growth to $8.0 billion during fiscal Q1 2025 (ended on July 26^th). This was driven by strong growth across Neuroscience, Cardiovascular, and Diabetes care, which saw 5.3% 6.9% and 12.6% YoY organic revenue growth, respectively.

Moreover, International growth has picked up steam, with 6.5% YoY organic revenue growth, outpacing the 4.1% growth in the U.S. MDT hasn’t had to sacrifice margins to grow the top line, as adjusted gross margin improved by 30 bps YoY due to favorable product mix and operating margin grew by 60 bps YoY to 24.4% (constant currency) due to cost efficiencies. This contributed to adjusted EPS growth of 7.5% on an FX-neutral basis.

MDT’s strong, industry-leading margins contribute to its A+ score for Profitability. As shown below, this includes a high EBITDA margin of 28% and levered FCF margin of 15%, both of which sit well above the sector average.

Given the strong start to fiscal year 2025, management raised full-year revenue growth guidance to 4.75% at the midpoint of range, up from 4.5% previously. Management also expects to grow revenue by mid-single digits in the current fiscal Q2 in progress. This includes a robust product pipeline in areas like diabetes, robotics, pulse field ablation (for atrial fibrillation), and hypertension, which are positioned for strong growth in the coming years.

This is supported by the success and strong market demand for its PulseSelect launch for the treatment of atrial fibrillation, as noted by management during the recent conference call:

The PulseSelect launch has been successful, with more than 550 physicians in 20 countries having treated over 10,000 patients. To meet the strong market demand, we’re dramatically increasing our PulseSelect catheter manufacturing capacity and expanding into new accounts.

As a result, we expect PulseSelect to meaningfully accelerate our overall CAS growth rate through this fiscal year, including a strong acceleration in Q2. And then we have our differentiated Sphere-9 focal catheter. This all-in-one catheter can perform high-density mapping, as well as pulse field and RF ablations.

Meanwhile, MDT carries a strong balance sheet with an ‘A’ credit rating from S&P. This is supported by $7.8 billion cash and short-term investments and a reasonably low net debt to TTM EBITDA ratio of 2.2x, sitting comfortably below the 3.0x safe level.

Importantly for income investors, MDT yields a respectable 3.2%. MDT is a Dividend Aristocrat with 47 consecutive years of dividend raises. The current dividend rate is also well-protected by a 53% payout ratio and comes with a 5-year CAGR of 6%.

Lastly, I continue to see value in MDT at the current price of $88.14 with a forward PE of 16.2, which as shown below, sits comfortably below its historical PE ratio of 18.2.

Analysts estimate 7% to 8% annual EPS growth over the medium term, which, I believe, is reasonable considering the aforementioned pipeline and adoption of new products in the marketplace. This, combined with a 3.2% dividend yield and potential for a reversion to its mean valuation, means MDT could deliver market-beating returns from here.

Risks to the thesis include competition from peers like Abbott Laboratories (ABT), which could pressure margins. Technological innovation across the industry also means that MDT needs to consistently invest in R&D to stay atop the field. Macroeconomic risks could also put a dent on near term growth. Moreover, the GLP-1 class of weight loss drugs by Eli Lilly (LLY) and Novo Nordisk (NVO) could help patients better manage diabetes and obesity, thereby providing an alternative to MDT’s solutions.

Investor Takeaway

Medtronic remains an attractive investment for income and total return potential, supported by its strong balance sheet, diversified revenue streams, and growing product pipeline. The company has delivered solid recent top-line performance alongside improving margins.

MDT’s robust pipeline in diabetes care, robotics, and cardiac therapies positions it for continued growth. It also carries an A-rated balance sheet and is a Dividend Aristocrat. Trading below its historical valuation, MDT presents a compelling opportunity for conservative investors seeking quality at a reasonably low price.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MDT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not an investment advisor. This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Medtronic: Undervalued Dividend Aristocrat With High Margins appeared first on Up2info.com.

• Medtronic is a Dividend Aristocrat with 47 consecutive years of payout growth.
• The MedTech company exceeded the analyst consensus for revenue and non-GAAP EPS in its fiscal first quarter.
• Medtronic’s interest coverage and debt-to-capital ratios are both healthy.
• Shares could be priced at a 10% discount to fair value.
• Medtronic looks to be poised to produce 12% annual total returns through fiscal year 2027.

When I’m investing in a business, one thing that I love to see is a company culture that can consistently reward its shareholders. This can be done in a variety of ways, including a steadily growing dividend, share repurchases, and investments in the business.

A company can only do these things over the long haul if it is doing right by its customers and its shareholders. Dividend Aristocrats are S&P 500 index (SP500) components that have upped their payouts for at least 25 consecutive years. These are businesses with extensive experience in executing at a high level for shareholders.

Medtronic (NYSE:MDT) is one such example of a Dividend Aristocrat. When I last covered it with a buy rating in June, I appreciated its excellent product portfolio and recent product launches. The company’s A-rated balance sheet was another plus. Lastly, shares were materially undervalued.

After releasing its financial results for the fiscal first quarter last month, I’m reiterating my buy rating. Medtronic’s recently launched products demonstrated momentum in the quarter, with the company surpassing the analyst consensus for both revenue and non-GAAP EPS. The company’s financial health remains solid. Finally, Medtronic’s valuation remains moderately discounted.

Innovation Is Restoring Medtronic’s Growth

Medtronic’s second quarter offered more evidence that growth is returning to the company. Its total revenue edged 2.8% higher over the year-ago period to $7.9 billion in the fiscal first quarter ended July 26th. This came in at $100 million more than the analyst consensus for the quarter.

Digging deeper, the topline growth is even more impressive. That’s because, accounting for $93 million of unfavorable foreign currency translation, organic revenue increased by 5.3% during the fiscal first quarter.

What was behind this uptick in growth in the fiscal first quarter? Predictably, it was strength in each of its core businesses.

Medtronic’s Cardiovascular segment was the biggest contributor to this topline growth in absolute dollars. The segment’s total revenue rose by 5.5% year-over-year to $3 billion for the fiscal first quarter. That was driven by vigorous performance from Pulsed Field Ablation, TAVR, Cardiac Surgery, and Coronary products.

The company’s Neuroscience segment posted $2.3 billion in total revenue during the fiscal first quarter. This was a 4.4% growth rate over the year-ago period. That was fueled by growth from Neuromodulation, Spine and Biologics, and Hemorrhagic Stroke products.

Medtronic’s Diabetes segment recorded $647 million in total revenue in the fiscal first quarter, which was an 11.8% year-over-year growth rate. Increased uptake of Simplera Sync and improved adoption of the MiniMed 780G insulin pump system were to credit for this topline growth.

The Medical Surgical segment was the only segment to not record reported revenue growth. Reported revenue decreased by 0.4% over the year-ago period to $2 billion for the fiscal first quarter. But adjusting for unfavorable foreign currency translation, organic growth was 1% during the quarter. Growth in Hernia, Wound Management, and Endoscopy and Perioperative Complications was canceled out by net sales declines in the Advanced Surgical Technologies and Respiratory Compromise product categories.

Medtronic’s non-GAAP EPS increased by 2.5% year-over-year to $1.23 in the fiscal first quarter. This topped the analyst consensus by $0.03 for the quarter. Backing out $0.06 of unfavorable foreign currency translation, currency-neutral non-GAAP EPS climbed by 7.5% over the year-ago period during the quarter.

Constant currency adjusted operating margin expansion helped currency-neutral non-GAAP EPS rise faster than total revenue in the fiscal first quarter. According to interim CFO Gary Corona’s opening remarks during the Q1 2025 Earnings Call, constant currency adjusted operating margin improved by 60 basis points to 24.4% for the quarter.

As a result of these expectation-defying results, Medtronic upped its guidance for FY 2025. The company increased its midpoint organic revenue growth rate from 4.5% (4% to 5%) to 4.75% (4.5% to 5%).

Currency-neutral non-GAAP EPS was raised from a midpoint of $5.45 ($5.40 to $5.50) to $5.46 ($5.42 to $5.50). Off the $5.20 base for FY 2024, the latter would be a 5% growth rate. The FAST Graphs analyst consensus of $5.46 in currency-neutral non-GAAP EPS for FY 2025 is in line with management’s midpoint.

Per Corona, Medtronic believes that currency headwinds will lessen as the fiscal year unfolds. In the back half of the fiscal year, high single-digit EPS growth is anticipated.

Medtronic has its product approvals and momentum from recently launched products to thank for its turnaround. In the past 12 months, the company has secured approximately 130 product approvals in key markets. These include the Simplera CGM in the U.S., the PulseSelect Pulse Field Ablation System in Japan, and the Inceptiv Spinal Cord Stimulator in the U.S.

Products like the MiniMed 780G insulin pump system and Symplicity Spyral Renal Denervation System should only pick up more steam as the quarters progress.

That’s why the FAST Graphs analyst consensus is that currency-neutral non-GAAP EPS is expected to rise by 7.2% in FY 2026 to $5.85. Another 8.2% increase in currency-neutral non-GAAP EPS to $6.33 is expected for FY 2027.

In closing, no conversation about Medtronic would be complete without emphasizing the strength of its balance sheet. The company’s debt-to-capital ratio in the mid-30% range is below the 40% that rating agencies like to see from the industry per The Dividend Kings’ Zen Research Terminal.

Medtronic’s interest coverage ratio of 8.6 in the fiscal first quarter was also respectable. This is why the company enjoys an A credit rating from S&P on a stable outlook (unless otherwise sourced or hyperlinked, all details in this subhead were according to Medtronic’s Q1 2025 Earnings Press Release, Medtronic’s Q1 2025 Financial Statements, Medtronic’s Q1 2025 Earnings Presentation, and Medtronic’s Q1 2025 10-Q Filing).

Fair Value Has Reached $100 A Share

In the three months since my previous article, shares of Medtronic have gained 11%. This is meaningfully ahead of the S&P 500 index’s 6% appreciation over that time.

Yet, I would contend that there’s still room for shares of Medtronic to ride higher in the coming months and years. This is supported by a current-year P/E ratio of 16.4, which is modestly less than the 10-year normal P/E ratio of 17.8 per FAST Graphs.

In the years ahead, I believe that the fair value multiple is right around 17.8. That’s because Medtronic’s forward annual currency-neutral non-GAAP EPS growth consensus of 7% is above the 10-year average of 3.7%. This suggests that the company could be worthy of a multiple in the high teens upon proving its worth with a few more strong quarters.

Currently, Medtronic’s FY 2025 is about 41% complete. That leaves another 59% of FY 2025 and 41% of FY 2026 still to come in the next 12 months. This is how I arrive at a forward 12-month currency-neutral non-GAAP EPS input of $5.62.

Applying a 17.8 multiple to the shares of Medtronic, I compute a fair value of $100 a share. From the current $90 share price (as of September 24th, 2024), this equates to a 10% discount to fair value. If the company meets the growth consensus and reverts to fair value, a 34% upside could be in store come the end of FY 2027.

More Payout Growth Ahead

Medtronic’s 3.1% forward dividend yield registers at double the healthcare sector’s median forward dividend yield of 1.4%. That’s sufficient for Seeking Alpha’s Quant System to award an A- grade for forward dividend yield and a B+ grade for overall dividend yield.

Medtronic also comes with a remarkable reputation for dividend growth. The company has upped its dividends paid to shareholders for 47 consecutive years. For perspective, that’s much greater than the sector median of 2 years per the Quant System.

The company’s appeal as a dividend payer doesn’t end there, either. Medtronic has a viable runway to keep growing its payout for the foreseeable future. The company’s EPS payout ratio is on track to be in the low 50% range in FY 2025. That’s less than the 60% EPS payout ratio that rating agencies like to see from the industry per The Dividend Kings’ Zen Research Terminal.

Thus, I believe that Medtronic will return to at least mid-single-digit annual dividend growth once its growth story is reasserted by the next fiscal year (FY 2026).

Risks To Consider

Medtronic’s efforts to revive growth appear to be yielding results but there are still risks to the investment thesis.

One risk to the company is the potential for a cyber breach. Medtronic’s tens of thousands of patents and other proprietary information make it a frequent target of attempted cyber breaches. If any are successful, the company’s proprietary information could be compromised. That could damage the investment thesis.

Another risk to the company is that it operates in a half-trillion-dollar and growing global industry. This massive market features no shortage of competition from eager upstarts looking to be disruptors to industry juggernauts like Medtronic.

If the company’s research and development spending doesn’t continue to produce breakthrough products, it could lose market share over time. That could result in diminished growth prospects.

The size and profitability of the global medical devices industry also make it vulnerable to regulatory risks. If any major markets enact unconstructive legislation, that could crimp Medtronic’s profit margins.

One final risk to the company is that it could fall victim to a global pandemic. If a major pandemic happens again, this could disrupt Medtronic’s operations via supply chain chaos and hospitals deferring the elective procedures in which its products are used. Research and development could also be delayed and that could push back product launches needed to keep the growth going.

Summary: A Dividend Aristocrat With Double-Digit Total Return Potential

Medtronic is a world-class business in just about every aspect. The company’s currency-neutral non-GAAP EPS growth is set to accelerate. Medtronic’s balance sheet is rock-solid. The dividend is well-covered by currency-neutral non-GAAP EPS. Clinching the buy case is the moderate undervaluation of Medtronic’s shares. This positions the stock well to put up double-digit annual total returns in the next two and a half years. That’s why I’m reaffirming my buy rating.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MDT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Medtronic: This Dividend Aristocrat Is Still A Buy Now appeared first on Up2info.com.

• Medtronic, a global developer and manufacturer of medical devices for chronic diseases, is now a $111 billion (by market cap) healthcare behemoth.
• Medtronic has increased its dividend for 47 consecutive years, with a 10-year dividend growth rate of 9.8%.
• Medtronic advanced its revenue from $20.3 billion in FY 2015 to $32.4 billion in FY 2024, a compound annual growth rate of 5.3%.
• Medtronic has been slowly paying down debt since the big Covidien acquisition in 2015.

Medtronic PLC (NYSE:MDT) is a global developer and manufacturer of medical devices for chronic diseases. Founded in 1949, Medtronic is now a $111 billion (by market cap) healthcare behemoth that employs 95,000 people. The company reports results across four segments: Cardiovascular, 37% of FY 2023 revenue; Neuroscience, 29%; Medical Surgical, 27%; and Diabetes, 7%.

Medtronic’s product portfolio is comprised of a variety of life-saving and life-improving medical devices that include implantable defibrillators, heart valves, insulin pumps, glucose monitoring systems, pacemakers, stents, and surgical tools. Medtronic has a product portfolio that’s both broad and dominant.

Morningstar highlights this broad product lineup: “Medtronic’s standing as the largest pure-play medical device maker remains a force to be reckoned with in the med-tech landscape. Pairing Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic’s position as a key partner for its hospital customers.”

When you can bring breadth, depth, scale, and expertise to the table, you build that lasting trust with customers and become dominant. Speaking on this dominance, Morningstar adds: “Medtronic has historically held roughly 50% share in its core heart devices. It’s also the market leader in spinal products, insulin pumps, and neuromodulators for chronic pain.”

A 50% share of market! Most companies would love to have that kind of market share. And this is a great area of the economy to have such command over. I say that because of “triple tailwinds” from demographics. The world is growing larger, older, and wealthier – all at the same time.

What does a larger pool of older people with more money mean? Well, it means rising demand for quality healthcare, as aging – something that’s part of the human condition – naturally leads to all kinds of health issues which often require intervention, and more wealth leads to more access. This is on top of a base level of demand for general healthcare purely from the standpoint of human beings aging over the course of time. Plus, this is inelastic demand we’re talking about.

Healthcare spending, especially when it comes to medical devices, is often non-discretionary. A life-or-death circumstance – say, a sudden heart problem – does not lend itself to price sensitivity or on-the-spot negotiation. If something like emergency surgery is suddenly needed, survival becomes far more important than the pricing of the medical devices required to save one’s life.

A rising level of base demand that’s also inelastic, all while dominating the field? Medtronic almost can’t lose. And that’s why the company’s revenue, profit, and dividend should all continue to grow nicely for many years to come.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Already, Medtronic has increased its dividend for 47 consecutive years. That very impressive track record easily qualifies Medtronic for its status as an esteemed Dividend Aristocrat. Actually, Medtronic is nearly a Dividend Aristocrat two times over.

The 10-year dividend growth rate of 9.8% is very strong, especially for a business that was already nearly four decades into growing its dividend a decade ago. However, the business got hit by the pandemic hard, and recent dividend raises have been modest. The five-year dividend growth rate of 7.4% shows some of that deceleration, but the most recent dividend increase of only 1.4% hammers the point home.

Medtronic has a rich history of growing its dividend at a high rate, and I don’t think the last few years of troubles (which I’ll delve into later) are emblematic of what this business is capable of over the long run. That said, the market has taken things into its own hands and adjusted this stock’s yield far higher than it usually is – just in case this growth scare is lasting.

The stock yields 3.1%. To put that in perspective, it’s 60 basis points higher than its own five-year average. A huge spread? No. Enough yield to make up for low-single-digit dividend growth indefinitely? Again, no. But I think the market is (appropriately) sniffing out a temporary issue with the business, bringing the yield up by a noticeable amount now (allowing for more cash flow out of the investment now) in order to compensate for the near-term growth issue.

If the business were collapsing, this stock would be way cheaper (and the yield would be way higher). But that’s not happening. On the flip side, if Medtronic can get back to its old ways of high-single-digit dividend growth, a 3%+ starting yield on top of that is awfully appealing. And there are signs it can do that.

With a payout ratio of 51.3%, based on midpoint guidance for FY 2025 adjusted EPS, which is about as close as it gets to a perfectly balanced payout ratio (one that equally divides earnings between business retainment and shareholder rewarding), this dividend is about as healthy as it’s ever been. The overall dividend profile from this Dividend Aristocrat (recent troubles notwithstanding) is very attractive.

Revenue and Earnings Growth

As attractive as the profile may be, though, some of these numbers are based on what’s happened in the past. However, investors must always be looking toward the future, as the capital of today gets risked for the rewards of tomorrow. As such, I’ll now build out a forward-looking growth trajectory for the business, which will come in handy when the time comes later to estimate intrinsic value.

I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth. I’ll then reveal a professional prognostication for near-term profit growth. Blending the proven past with a future forecast in this way should give us the kind of information we need to make an informed decision on where the business could be going from here.

Medtronic advanced its revenue from $20.3 billion in FY 2015 to $32.4 billion in FY 2024. That’s a compound annual growth rate of 5.3%. Very respectable.

I’m usually looking for a mid-single-digit top-line growth rate (or better) from a mature business, and Medtronic hit the mark squarely. However, Medtronic’s revenue was positively impacted in a big way starting in FY 2016, after Medtronic acquired Covidien PLC in 2015 for almost $50 billion. This complementary addition to the company (with Covidien focusing on endomechanical instruments, adding to Medtronic’s cardiovascular and orthopedic offerings) significantly increased the sales base of the combined company.

Meanwhile, earnings per share grew from $2.41 to $5.20 (adjusted) over this period, which is a CAGR of 8.9%. That’s actually a pretty solid result during a rough stretch for the business – especially considering the fact that it takes into account the dilution that occurred as a result of the aforementioned acquisition.

You’ll notice how closely EPS growth and dividend growth over the last decade line up, showing us how deftly management has guided that dividend. Notably, I used adjusted EPS for FY 2024. Not a totally fair, apples-to-apples comparison, but I only did so because FY 2024 included a number of special items that threw off GAAP results. I think the ~9% result shown above is a fairly accurate reflection of Medtronic’s true growth. Looking forward, CFRA is projecting a 4% EPS CAGR for Medtronic over the next three years.

Circling back around to the troubles I touched on earlier, Medtronic has struggled over the last few years as the pandemic-related disruptions to the US healthcare system caused many people to delay certain health treatments (such as elective surgeries). Adding to Medtronic’s woes, there were also issue with hospitals meeting staffing needs.

If a health fix could be delayed, it probably was. However, a temporary delay is not the same thing as a permanent cancelation, and all these delaying is causing pent-up demand.

A secondary headwind for Medtronic over the last few years was the fact that the company had a hard time bringing products to market, including a poorly-timed rollout of a key robotic-assisted surgery platform (called Hugo) – something that could not be fully utilized at the time (due to the aforementioned healthcare complex issues). So Medtronic suffered from both supply and demand constrictions.

CFRA touches on all of this: “We expect strong results from [Medtronic] as its health care provider customers serve pent-up demand for procedures that had to be postponed due to the pandemic and then subsequent staffing shortages at medical facilities. [Medtronic] also stands out from medical device peers because of its product innovation and new launches, which drove market share gain during the pandemic and should continue to do so over the long term. One product line that has particularly immense potential is [Medtronic’s] robotic-assisted surgery platform, which we see ultimately being adopted worldwide, up from around 13 countries using the technology in FY 24.”

There’s palatable optimism running throughout that passage, and I think there’s good reason to be optimistic over the long run. While it’s difficult to say just how much of a bounce back we’ll see over the next year or two, Medtronic’s breadth, depth, and market share all add up to a winning business model. In my view, it’s fair to be cautious over the near term, and I don’t take issue with CFRA’s 4% number.

If that were to persist for years to come, that would be super disappointing. On the other hand, if it’s only a short-term phenomenon, which starts to fade away once everything in the industry normalizes, it’s not a major problem. Backing up CFRA’s number to a large degree is Medtronic’s own FY 2025 adjusted EPS guidance. At $5.46 (at the midpoint), this would represent 5% YOY growth. That’s not far away from where CFRA is at.

While I wouldn’t expect much more than mid-single-digit EPS and dividend growth out of Medtronic over the next year or two, it’s hard to see how Medtronic can’t get back to high-single-digit growth over the longer term. There’s nothing to indicate a permanent impairment of any kind here.

And so I would give Medtronic the benefit of the doubt and assume the long-term dividend growth profile is not something that is forever tainted by the pandemic. Given that, a 3%+ yield and high-single-digit dividend growth from a Dividend Aristocrat is not bad at all.

Financial Position

Moving over to the balance sheet, Medtronic has a decent financial position that should improve over the coming years (as the business and industry normalize). The long-term debt/equity ratio is 0.5, while the interest coverage ratio is nearly 8. That latter number is negatively impacted by GAAP results, and I suspect it’ll look much better in a few years.

The good news is, Medtronic has been slowly paying down debt since the big Covidien acquisition in 2015. Long-term debt is down by nearly 30% since FY 2015. Also, Medtronic carries cash that amounts to about 1/3 of long-term debt. I’d also just quickly point out that less than $25 billion in long-term debt is not concerning for a company with a market cap of over $100 billion.

Profitability is okay, but this might be the most disappointing aspect of the business’s fundamentals. Return on equity has averaged 8.3% over the last five years, while net margin has averaged 13.7%. Margins are pretty good. But I’d really like to see higher returns on capital here, as single-digit ROE and ROIC (close to WACC) make it difficult to generate excess returns.

While Medtronic isn’t quite the powerhouse business it was a decade ago, it’s still a formidable force in its industry. And with IP, R&D, switching costs, economies of scale, a global distribution network, high barriers to entry, and a diversified portfolio of entrenched products, the company does benefit from durable competitive advantages.

Of course, there are risks to consider. Regulation, litigation, and competition are omnipresent risks in every industry. I see all three of these risks as being elevated for this business model in comparison to many other business models.

Any changes in the way healthcare spending is managed, especially in the United States, would almost certainly impact the company. Medtronic occasionally has to recall products, which involves costs and possible reputational damage.

Demand for medical devices is fairly disconnected from economic cycles, but a recession could cause people to delay or cancel elective surgeries. Any major technological changes in medical devices can alter the competitive landscape, which pressures Medtronic to constantly innovate and stay ahead of the tech curve. GLP-1s may reduce the severity of, or even altogether eliminate, a range of health issues, leading to lower demand for medical devices broadly.

Medtronic has its fair share of risks, but that’s true for just about every business out there. However, with the stock down more than 30% from all-time highs, the valuation seems to be pricing in an unreasonable amount of risk…

Valuation

The P/E ratio on the stock is 30.4. That looks high, but it’s only because of GAAP results which have inadequately expressed the company’s true growth profile over the last few years. This has been a recurring trend, as the stock’s five-year average P/E ratio is 30.3. We’re basically on the button right now. However, referring back to midpoint guidance for this year’s adjusted EPS, the forward P/E ratio drops to just 16.5. That’s more like it.

Moreover, the sales multiple of 3.7. which factors out the GAAP nonsense, is very undemanding, and it compares favorably to its own five-year average of 4.2. And the yield, as noted earlier, is significantly higher than its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a dividend discount model analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 7%. This kind of expectation can look aggressive or cautious, depending on how you view the business.

Based on the EPS and dividend growth over the last decade, a 7% growth rate isn’t a particularly high hurdle for Medtronic to clear. However, recent business and dividend growth has been in a low-single-digit range, and the near-term forecast for EPS growth calls for more of that.

I want to reiterate this is a long-term dividend growth rate expectation. Over the next few years, Medtronic is likely to hand out mediocre dividend raises. But if we zoom out and look at the next decade or two, it’s just difficult to imagine a scenario in which this business can’t get its old mojo back. It has the kind of market dominance and portfolio breadth that makes it hard to do poorly.

The DDM analysis gives me a fair value of $99.87. The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide. The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today. I find it to be a fairly accurate way to value dividend growth stocks. My sense of this stock is that it’s priced a bit cheaper than it ought to be. But we’ll now compare that valuation with where two professional stock analysis firms have come out at. This adds balance, depth, and perspective to our conclusion.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system. 1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value. Morningstar rates MDT as a 4-star stock, with a fair value estimate of $112.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line. They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold. CFRA rates MDT as a 4-star “buy”, with a 12-month target price of $99.00. I’m almost exactly where CFRA is at on this one. Averaging the three numbers out gives us a final valuation of $103.62, which would indicate the stock is possibly 13% undervalued.

Bottom line: Medtronic PLC is a dominant force in the medical devices space that has built a commanding share of its market. Its broad portfolio of life-improving and life-saving products often have inelastic demand and secular demographic tailwinds are blowing its way. With a market-beating yield, high-single-digit dividend growth, a balanced payout ratio, nearly 50 consecutive years of dividend increases, and the potential that shares are 13% undervalued, long-term dividend growth investors on the lookout for an inexpensive Dividend Aristocrat have an obvious target here.

Note from D&I: How safe is MDT’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 99. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, MDT’s dividend appears Very Safe with a very unlikely risk of being cut.

Disclosure: I’m long MDT.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

The post Medtronic: An Undervalued Stock With Durable Competitive Advantages appeared first on Up2info.com.

• Medtronic faced challenges, including poor focus, lack of innovation, and COVID-19 impact, leading to share price stagnation since 2018.
• Despite recent improvements in performance, Medtronic remains undervalued with solid competitive advantages and a promising dividend streak.
• The company’s focus on innovation, strong market position, and dividend growth potential make it a long-term buy for conservative investors.

Medtronic (NYSE:MDT) has faced several challenges in the past decade. Some were probably because of poor focus and lack of innovation, while others, like COVID-19, were out of their control. Consequently, the share price has languished after peaking in mid-2021. It currently trades at levels in 2018. However, Medtronic is a market leader with solid competitive advantages. Also, performance has recently improved. The stock is undervalued and possesses a nice yield. I expect the dividend streak to continue and the stock to become a Dividend King. I view Medtronic as a long-term buy for conservative dividend growth investors.

Overview of Medtronic

Medtronic plc is a global leader in medical devices. It develops, manufactures, and sells devices to hospitals, physicians, and other customers in many end markets. Revenue is almost equally divided between the United States and internationally. For tax purposes, the firm is based in Minnesota but headquartered in Ireland.

The company operates in four business segments: Cardiovascular, Neuroscience, Medical Surgical, and Diabetes. Medtronic sells products in many end markets in these segments. It is usually the market leader or number two in each end market.

Total revenue was more than $32.36 billion in fiscal year 2023 and $32.58 billion in the last twelve months (“LTM”).

Revenue and Earnings Growth

Medtronic’s revenue and earnings per share (“EPS”) growth has been inconsistent since 2015 when it acquired Covidien. It has been in the low single digits or flat for many years. A few years have seen declines because of the COVID-19 pandemic. Revenue growth has been only about 1% in the past five years, while EPS growth has actually been a negative 0.1%. Obviously, these are not great numbers and should concern dividend growth investors because growth must occur to maintain long-term streaks.

That said, Medtronic’s operational execution is improving. Revenue increased around 3.6% in fiscal year 2024, although EPS fell about 1.5%. However, the company forecasts a 4% to 5% revenue, and a 9% to 11% EPS increase in fiscal year 2025. Investors may ask if this represents a turnaround. It does, but the investors have placed Medtronic in the ‘show me before I believe it’ category. The share price has languished despite beating estimates in the past two quarters. It is up only ~3.1% in the last six months and ~7.3% this year. In fact, the share price is about the same as in 2018.

Notably, growth is coming organically, with some periodic tuck-in acquisitions. The firm is focusing capital on research & development for organic growth. It spent $2.3 billion in fiscal year 2020, which rose to $2.7 billion in 2024, a 4% compound growth. The result has been a relatively high cadence of innovation and FDA product clearances, with approximately 130 in the last twelve months. Medtronic continues to focus on innovation and intellectual property development under the current CEO, and thus, we expect this pace to continue. Revenue and EPS growth will likely benefit.

Besides IP and product development, Medtronic relies on a well-trained sales force and clinician relationships. Physicians and nurses often develop device preferences based on efficacy, safety, and training. Well documented clinical trials demonstrating the first two and sales reps helping clinicians with the third area are critical for long-term growth.

Recent Challenges

Besides the COVID-19 pandemic, which caused medical procedure deferrals and supply chain disruptions, Medtronic has faced difficulties since the large Covidien acquisition revolving around operational execution and a lack of innovation.

The firm faced an FDA warning letter for Its MiniMed 600 insulin pump, which I highlighted in an earlier article. This, combined with competition from pod-based insulin delivery with no pumps or needles and continuous glucose monitoring (“CGM”), impacted sales. The firm’s recent product approval of the MiniMed 780G and better execution have seemingly turned around the segment, which saw 12.6% organic growth in the just-completed quarter. Also, the firm announced it is integrating CGM with its insulin delivery platforms, which should drive sales.

Next, the company had two underperforming businesses, Renal Care Solutions and Patient Monitoring & Respiratory Interventions. They were experiencing falling sales and margin compression despite being leaders in their end markets. The company planned to spin out or sell these businesses. However, management sought more than buyout firms were willing to offer because of their struggles. More recently, management has changed course, and the businesses are being retained and housed in a new acute care and monitoring business unit, but ventilator sales will be discontinued. Respiratory ventilators are increasingly unprofitable. Still, the Medical Surgical segment is struggling with flat growth. This segment must return to growth before investors are fully convinced about Medtronic’s turnaround.

Besides the items discussed above, Medtronic’s main risks are regulatory and legal. It must gain FDA clearance before marketing a product. Another risk is that Medicare payments may be reduced or at least negotiated, causing lower profitability.

Competitive Advantages

Medtronic has several enduring competitive advantages that should allow its top and bottom lines, and consequently the dividend, to increase over time.

The company’s scale in medical devices is unparalleled. It is one of the largest pure-play medical device makers in the world. Along these lines, it is the market leader in heart devices, insulin pumps, neuromodulators, spinal products, acute care & monitoring, etc. This scale and leadership lead to switching costs. Competitors must demonstrate efficacy and safety with new technologies to gain market share. Marginal improvements will probably not cause significant shifts in customer usage.

Next, Medtronic has well-known brands to its customers. The firm’s long history of innovation and pipeline builds on past successful products. Physicians and nurses often prefer products based on relationships with sales representatives and user experience. Competitors must overcome these barriers to displace an extant product. Although relationships may be supplanted, user experience and training are more significant barriers that result in product loyalty for each iteration.

Lastly, Medtronic has an innovation culture. Because of continuous innovation, medical device technologies have a finite lifespan. Even though patents exist for many years, companies must develop new products to replace older ones that have become outdated. Medtronic’s innovation focus and cadence are an advantage.

Dividend Analysis

Medtronic’s underperformance has caused the share price to drop and the dividend yield to soar simultaneously. It nearly reached 4%, the highest value in the past decade. Recent share price gains have caused the yield to decrease to roughly 3.2%, a still respectable value. It is more than the 5-year average of 2.65%. In fact, until 2022, the yield did not exceed 3%, making the current value an excellent one.

Furthermore, Medtronic is a Dividend Aristocrat with a 47-year streak of increases, the most recent on May 23^rd. The quarterly dividend was raised 1.4% to $0.70 from $0.69 per share. The dividend growth rate has been around 7% in the trailing five years and 9.6% in the last decade. Although the growth rate has slowed, the company is better positioned for the future because the payout ratio has come down.

The annual dividend is supported by solid safety, which has improved with better earnings results. The earnings payout ratio is approximately 52%, less than our target value of 65% or less. Free cash flow (“FCF”) of $5,200 million supports the dividend requirement of $3,646 million. The dividend-to-FCF ratio of 70% is precisely our desired value but above the firm’s minimum of 50%. Although not elevated, it is worthwhile to monitor this value. An increase would make Medtronic less desirable. However, FCF improved about 14% compared to fiscal year 2023. Higher revenue and operating income should push FCF higher over time.

Medtronic’s other safety metrics are reasonable. After ballooning from the Covidien purchase, net debt on the balance sheet has come down. It is currently at $20,022 million with a leverage ratio of ~2.1X and interest coverage of ~8.8X. These values are rational, and debt does not place the dividend at risk for a cut. The credit rating agencies give an A/A3 upper-medium investment grade long-term rating.

Medtronic has done an excellent job of improving its results and operational execution after the Covidien acquisition. It has also increased the dividend and repurchased shares, while reducing debt by about $14 billion.

Valuation

The share price has languished for years. It is down about 16% in the past five years. Better results have renewed investor interest this year. But still, the share price has gained only about 7.3% year-to-date and nearly 5.6% in the past year. Concurrently, the price-to-earnings (P/E) ratio is 16.2X, below the trailing five- and ten-year ranges. The valuation drop is primarily because of recent challenges and investors taking a wait-and-see attitude.

The consensus analyst estimates and mid-point of company guidance for earnings per share in fiscal year 2025 is $5.45. We will use 17X as the fair value multiple near the midpoint of the 10-year range, accounting for past difficulties. As a result, our fair value estimate is $92.65. The present share price is ~$88.35, indicating Medtronic is undervalued.

Applying a sensitivity calculation using P/E ratios between 16X and 18X, we obtain a fair value range from $87.20 to $98.10. Hence, the stock price is approximately 90% to 101% of the fair value estimate.

Estimated Current Valuation Based On P/E Ratio

Click to enlarge

Source: Dividend Power Calculations

How does this calculation compare to other valuation models? Portfolio Insight’s blended fair value model, combining the P/E ratio and dividend yield, estimates a fair value of $101.82 per share. The Gordon Growth Model provides a fair value of $93.33, assuming a discount rate of 9% and a conservative annual dividend growth rate of 6%.

The three-model average is ~$95.33, signifying that Medtronic is undervalued at the current price.

Final Thoughts

Medtronic’s share price has been depressed, and the stock is undervalued because of past operational execution challenges, COVID-19, and declining sales in some end markets. The equity has historically yielded less than 3% but is greater than that percentage now. Moreover, the forward P/E ratio is ~16.2X, below the 5-year and 10-year ranges. Medtronic has also reinvigorated its product pipeline and improved results as part of a turnaround. The combination of undervaluation, dividend growth, dividend safety, and competitive advantages is attractive. I view Medtronic as a long-term buy.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MDT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Medtronic: Is The Company Back? appeared first on Up2info.com.

• Medtronic stock underperformed the market, up only 4% in the past year.
• The options market predicts a 3.3% stock price swing post-earnings.
• Mid-single-digit EPS growth, rising dividends, and historically high yield for Medtronic are positive factors.
• I highlight key price levels to watch ahead of its Q1 2025 report and assess the options situation.

Medtronic (NYSE:MDT) continues to tread water as the broader market advances. The stock is up just 4% over the past 12 months, significantly underperforming the iShares U.S. Medical Devices ETF (IHI) which is higher by 10%. The Health Care Sector ETF (XLV) has returned better than 15% while the S&P 500 has beaten them all with a 28% performance from year-ago levels.

I reiterate a buy rating on MDT, though. I see the stock as still undervalued today ahead of its Q1 2025 earnings report due out Tuesday this week. The company has topped estimates in each of the previous eight quarters, though the stock traded lower post-earnings back in May.

This time around, the options market has priced in a modest 3.3% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the Q1 report, according to data from Option Research & Technology Services (ORATS).

But let’s take a holistic view of Medtronic and where things stand on this $109 billion market cap Health Care Equipment industry company.

Medical Device Stocks Sag Relative to the SPX, YoY

According to Bank of America Global Research, Medtronic is a MedTech company 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.

Back in May, MDT reported a solid set of quarterly results. Q4 non-GAAP EPS of $1.46 was a penny beat while revenue of $8.6 billion, up just 0.6% from the same period a year earlier, was a material $150 million beat. The management team increased the company’s dividend to $0.70 per share, marking the 47th consecutive year of dividend hikes, reaffirming MDT as a leading dividend aristocrat in the S&P 500.

As for the guide, Medtronic now expects FY 2025 organic sales growth to be in the 4% to 5% range, ex-currency impacts. There could be an FX tailwind in the quarter now underway, given that the US Dollar Index has slumped to its worst level since January. The management team forecasts ‘25 diluted non-GAAP EPS of $5.40 to $5.50.

Big picture, mid-single-digit top line and earnings growth is expected given its diverse worldwide exposure. What’s encouraging is that 2024 marked a series of low-bar EPS quarters, so the upcoming quarterly reports could have a tailwind from the year-on-year perspective. The firm’s healthy device pipeline and ongoing R&D efforts also set the stage for better bottom-line growth through 2027.

All the while, dividends and buybacks support the shareholder proposition. For the quarter about to be reported, trends in its Electrophysiology (EP) will be important to watch on the growth side of the ledger and updates to its Affera Sphere-9 device could drive price action on Tuesday. Analysts at UBS recently came out positive on MDT’s diabetes turnaround, but Stifel sees a muted growth outlook.

Key risks include disappointing clinical data around its devices, weaker revenue growth and guidance if new products fail to gain a foothold in the healthcare space, pipeline delays, and increased competition.

On the earnings outlook, analysts at BofA see EPS rising 4% this year, with even better operating per-share earnings growth in 2026. By 2027, non-GAAP EPS could top $6. The current Seeking Alpha consensus numbers are about on par with what BofA projects, so there is a decent amount of confidence in the profit numbers. As for Medtronic’s revenue, consistent sales growth between 3% and 5% is forecast through FY 2027.

Dividends, meanwhile, are projected to continue their rise, likely surpassing $3 per share in the out year, resulting in a yield that could top 3.5% in the coming months – a historically high rate. With a mid-teens P/E and reliable free cash flow trends, I continue to like MDT from a value point of view.

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

On valuation, If we assume $5.60 of non-GAAP EPS over the coming 12 months and apply the stock’s 5-year average P/E, then MDT should trade near $109.

But given its below-market EPS growth rate, shaving at least a turn off the earnings multiple is appropriate. So, an 18x P/E on the same amount of EPS yields a target of $101, a modest increase from my previous analysis in the springtime.

Medtronic: Encouraging Valuation Metrics, Historically High Yield

Compared to its peers, MDT features a soft valuation rating, but we see that across the MedTech space. Its growth trajectory has been admittedly weak, but the outlook appears more sanguine. Meanwhile, Medtronic’s profitability is very healthy, evidenced by the current 4.6% free cash flow yield and steady EPS.

Share-price momentum has also taken a slightly improved turn, but I will note a key resistance level on the chart to monitor through the upcoming quarterly release. Finally, the sellside remains unimpressed with MDT, indicated by a high 15 downward EPS revisions compared with just eight upgrades in the past 90 days.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q1 2025 earnings date of Tuesday, August 20 BMO with a conference call immediately after the numbers hit the tape. You can listen live here. Shares then trade ex a $0.70 dividend on Friday, September 27.

Corporate Event Risk Calendar

The Technical Take

MDT has traded sideways following my last analysis, posting decent earnings numbers but lacking a real bullish spark. Notice in the chart below that shares remain under key resistance, currently near $85. But if the stock breaks through that line, then a bullish upside measured move price objective to about $107 would be in play based on the height of the current consolidation, added on top of the hypothetical breakout point. What’s also encouraging is that the RSI momentum oscillator at the top of the graph has hit its best mark in three months, helping to confirm the price rise, also the best since May.

I see support in the mid-$70s, where a downtrend support line comes into play. Moreover, the lows from late 2022 and early 2023 are in the $75 to $76 zone, so that could be long-term support. But with a rather flat long-term 200-day moving average, the bulls have yet to regain control of the primary trend for now. Still, MDT is above both the 200dma and the shorter-term 50dma.

Overall, I like the stock’s rally right today and its one-month outperformance. That augers well for how shares might respond post-earnings this week.

Shares Under Resistance, Positive RSI Trends, Mid-$70s Support

The Bottom Line

I have a buy rating on Medtronic. I see this dividend aristocrat as a solid value play going into earnings, while its technical chart has some positive signals despite the stock being under resistance.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Medtronic: Healthy Vital Signs Heading Into Earnings appeared first on Up2info.com.

• Medtronic is a strong option for investors seeking both low volatility and consistent dividend growth.
• I am quite positive about recent developments related to new crucial FDA approvals.
• Various valuation approaches suggest that the current share price is attractive.

Investment thesis

My initial bullish thesis about Medtronic (NYSE:MDT) aged somewhat good as the stock delivered a total 1.9% return since mid-February. As I underlined in my initial thesis, MDT is a good option for investors seeking low-volatility stock with solid dividend growth.

The company reports its fiscal Q1 earnings soon, on August 20. Today I want to update my thesis and explain why I believe there are robust reasons to remain moderately bullish about MDT. Moreover, the valuation still looks good. All in all, I reiterate my “Buy” rating for MDT.

MDT FQ1 earnings preview

MDT released its latest quarterly earnings on May 23, surpassing revenue and adjusted EPS consensus estimates. On the other hand, there was a big miss against consensus from the perspective of GAAP EPS. Revenue was almost flat YoY with a shallow 0.5% growth.

The upcoming quarter’s earnings are scheduled next week, for August 20. Wall Street analysts expect FQ1 revenue to be $7.90 billion, around 2.5% higher on a YoY basis. The adjusted EPS is expected to be flat YoY at $1.2. Sentiment of Wall Street analysts around the upcoming earnings release is quite bearish with 17 downgrade EPS revisions over the last 90 days.

MDT has a solid earnings surprise record and several previous quarters there were only positive revenue and adjusted EPS surprises. What is also important is that the stock is rarely a big mover after earnings releases, according to historical share price movements.

Recent developments are mostly positive for MDT investors. The company declared a $0.70 quarterly dividend on August 16, in line with the previous one. Moreover, MDT got upgraded from “Sell” to “Hold” by UBS analysts, with optimism around the ability to drive growth in the company’s diabetes segment. The optimism looks sound since the industry is expected to demonstrate solid growth. According to Statista, diabetes care devices industry is expected to deliver a 12.2% CAGR between 2024 and 2029, which is a solid tailwind for MDT’s diabetes business. Moreover, Medtronic has recently won an FDA approval for its Simplera continuous glucose monitor [CGM].

Recent information also suggests that Medtronic received another important FDA approval for its asleep deep brain stimulation [DBS] surgery. Medtronic claims that it has become the first and only company getting an FDA approval to conduct DBS surgeries. The DBS surgery solution is for people with Parkinson’s disease and with essential tremor. This is also a crucial positive development for MDT as Parkinson’s disease is also a big problem in the U.S. According to Parkinson’s Foundation, nearly 90,000 people in the U.S. are diagnosed with this disease each year and the combined direct and indirect cost of Parkinson’s is estimated to be nearly $52 billion per year in the U.S. alone.

All these developments are crucial for the company’s long-term revenue prospects. The good part is that the management is not also focused on driving revenue growth, but also expand value for shareholders. The company restructured its facilities, which allowed it to optimize the headcount in 2023. According to news as of mid-June 2024, the company continues laying off employees.

Valuation update

MDT demonstrated a modest 3.7% share price increase over the last twelve months, and the 52-week range varied between $69 and $89. The stock’s performance has lagged behind the broader U.S. market and the Health Care sector (XLV) over the last 12 months. Seeking Alpha Quant assigns MDT a low “D” valuation grade mainly due to the massive forward PEG ratio, but other ratios look attractive. What is crucial is that most of the valuation ratios are notably lower than MDT’s historical averages.

Since MDT is a mix of a growth and value stock, in my opinion, simulating both the dividend discount model [DDM] and discounted cash flow [DCF] approaches will be sound for my valuation analysis. I will use an 8.62% discount rate for both models, which was figured out using the CAPM approach below.

MDT has an exceptional dividend consistency, which gives me high conviction that consensus dividend estimates are reliable to incorporate into my DDM. That said, I use an FY 2025 $2.74 projection. MDT also has a solid dividend growth record, but to be on the safe side, I use the last three-years’ dividend CAGR of 5.34%. According to my DDM analysis, the stock’s fair price is $83.5. This is very close to the current share price, meaning that MDT is approximately fairly valued.

Now I will proceed with the DCF simulation. I use a 54% revenue CAGR for the next decade, which looks like a fair deceleration compared to the last decade’s 7% rate. Moreover, my projected revenue growth rate is approximately in line with the revenue consensus estimates. I use a flat 16.87% FCF margin, which is the TTM level. To be conservative, I will also deduct from my fair value calculation the current $18.01 billion net debt position.

According to my DCF simulation, the business’s fair value is around $118 billion. This is 10% higher than the current market cap, meaning that DCF meaning that MDT is attractively valued from the perspective of future cash flows.

Risks update

The stock price declined by 17.8% over the last five years, meaning it was not a good choice for investors who were seeking capital gains apart from the solid dividend growth. Potential investors, especially those targeting growth, should be ready for “boring” share price dynamics. On the other hand, considering the length of the timeframe below, we can see that the stock has been trading in a relatively narrow corridor and is currently much closer to the lower edge of the range, which increases the probability of a rebound to higher levels in the short term.

The major business risk that I see is the fierce competition. There are numerous competitors in the Health Care Equipment industry, which are approximately of the same market cap as MDT, which includes Boston Scientific Corporation (BSX), Stryker Corporation (SYK), and Intuitive Surgical (ISRG). I will not dig deep into comparisons of offerings of each company because the environment and technologies are rapidly evolving, and I would better look from the perspective of financial metrics and their dynamics.

Despite the fact that the market caps of all these companies are not very far from MDT’s, we can see that Medtronic is far larger from the perspective of revenue. Such an inconsistency between the differences in market cap and revenue highly likely means that investors perceive MDT as weaker than peers. Indeed, from the perspective of profitability ratios, I cannot call MDT an undisputed leader as it lags behind competitors across some metrics.

Moreover, MDT demonstrates a much more modest revenue growth than its peers. While investors apparently highly value growth dynamics and prospects, I do not think it is a big red flag for MDT. First, the company is still by far the largest from the perspective of revenues and operating cash flows generated, meaning that MDT generates more resources to reinvest into business in absolute terms. Second, the management’s efficiencies initiatives are working, which we have seen in the financial analysis, which means that MDT will close the gap in terms of profitability metrics compared to the competition.

Bottom line

To conclude, I believe that MDT is still a “Buy”. Recent developments are quite positive and historical share price movements suggest that buying this stock before earnings is not very risky. Moreover, the valuation is still attractive.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Medtronic: Still A Buy Before Earnings appeared first on Up2info.com.