Should You Buy Medtronic Stock Around $90?

Medtronic stock (NYSE: MDT) reported its Q1FY23 results on Aug 23, with revenue falling above and earnings below our estimates. MDT stock has declined 6% in a week, while it’s down 3% in a month. After the recent fall, we believe MDT stock is undervalued, as discussed below.

Medtronic’s revenue (Q1) of $7.4 billion was down 8%, while its EPS of $1.13 was down 17% y-o-y, compared to our estimates of $7.3 billion and $1.15, respectively. The revenue growth was impacted due to forex headwinds and supply chain disruptions. Furthermore, it was a tough comparison to the prior-year quarter, which benefited from higher ventilator sales. The adjusted operating margin contracted 320 bps due to higher costs, primarily SG&A, which grew 1% y-o-y, compared to the revenue decline of 8%.

However, the company reiterated its full-fiscal year guidance with organic revenue growth expected to be in mid-single-digits and earnings to be between $5.53 and $5.65 on a per share and adjusted basis and includes the impact of forex headwinds. Despite a high single-digit decline in top-line in Q1, the company’s robust outlook implies that it expects sales to rebound over the coming quarters, especially in the second half of the fiscal year.

Now, our Q1 forecast was higher than the street estimates, and Medtronic beat the consensus figures. Still, its stock price declined in line with its peers, including Abbott, Intuitive Surgical, and Baxter, which are also down between 4 and 5% in a week. For Medtronic, in particular, the recent dip offers a buying opportunity for long-term investors, in our view.

We have updated our model to reflect the latest earnings. We expect full-fiscal 2023 revenue to be $32.0 billion and earnings to be $5.58 on a per share and adjusted basis. We have revised Medtronic’s Valuation to be around $118 per share (vs. $114 earlier), which is 33% above the current market price of $89. At its current levels, MDT stock is trading under 16x its expected forward earnings, compared to the last three-year average of 20x, implying that MDT stock is attractive from a valuation point of view.

But what about the near term?

Now that MDT stock has seen a fall of 3% in a month, will it continue its downward trajectory, or is a rise imminent? Going by historical performance, there is a higher chance of an increase in MDT stock over the next month. A move of -3% or more in a month for Medtronic has occurred 503 times in the past ten years. Of those, 278 instances resulted in MDT stock rising over the subsequent one-month period (twenty-one trading days). This historical pattern reflects 278 out of 503, or a 55% chance of a rise in MDT stock over the coming month. See our analysis on Medtronic Stock Chance of Rise for more details.

Calculation of ‘Event Probability‘ and ‘Chance of Rise‘ using the last ten years’ data

  • After moving -6% or more over five days, the stock rose on 54% of the occasions in the next five days.
  • After moving -5% or more over ten days, the stock rose in the next ten days on 59% of the occasions
  • After moving -3% or more over a twenty-one-day period, the stock rose on 55% of the occasions in the next twenty-one days.

This pattern suggests a higher chance of a rise in MDT stock over the next five days, ten days, and one month.

Medtronic (MDT) Return (Recent) Comparison With Peers

  • Five-Day Return: JNJ highest at -1.2%; MDT lowest at -5.9%
  • Ten-Day Return: BSX highest at -1.7%; ISRG lowest at -7.3%
  • Twenty-One Day Return: BSX highest at 8.4%; BAX lowest at -12.0%

While MDT stock may see higher levels, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Becton Dickinson vs. Amerco.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

 Returns Aug 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 MDT Return -4% -14% 25%
 S&P 500 Return 0% -13% 85%
 Trefis Multi-Strategy Portfolio -1% -14% 241%

[1] Month-to-date and year-to-date as of 8/25/2022
[2] Cumulative total returns since the end of 2016

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