Medtronic’s Expansion Gains Momentum—Time for a Market Shift?
Medtronic’s (NYSE: MDT) growth efforts and investments in medical technology innovation are starting to pay off. The company's pulsed field ablation (PFA) technology is a key growth driver, strengthening both its cardiac segment and overall business expansion. However, the Q3 results were underwhelming relative to the consensus forecasts reported by MarketBeat, which means the stock price turnaround will take longer than initially indicated. The bad news is that new highs are unlikely until later in the year. The good news is that investors have more time to build their positions while the stock is trading near long-term lows.
Medtronic’s Mixed Results Highlight Operational Improvements
Medtronic had a decent quarter, but it was less than the analysts expected. The company's $8.3 billion in net revenue was up 2.5% compared to the prior year, 4.1% organically, driven by strength in most segments, but a hair shy of the consensus forecast. Diabetes led with a nearly 10.5% increase, followed by smaller but still solid 5% gains in Cardiac and Neuroscience. Medical/Surgical is the only area of weakness, contracting by 0.4% organically, but it is expected to revert to growth soon.
The margin news highlights the company’s operational improvements. The company reported improved gross and operating margins and leveraged gains on the bottom line. The adjusted EPS not only grew by 7% compared to the more tepid 2.5% top-line advance but also outperformed expectations by 220 basis points despite relative revenue weakness. The takeaway is that the company has improved its leverage and growth outlook, setting it on track for sustained revenue growth and accelerated earnings growth.
Guidance is another reason a stock market reversal is still possible. The Q3 results were tepid, but guidance was reaffirmed in a range with consensus targets at the low end. Revenue growth is expected to accelerate in Q4, resulting in a 4.75% to 5% annual increase, and the following year should produce the same.
Medtronic’s Cash Flow Sustains Balance Sheet Health and Robust Capital Return
Medtronic’s results are tepid, but the weakness is insufficient to upset the robust capital return outlook. The company’s cash flow is sufficient to sustain the healthy balance sheet while paying a solid dividend and buying shares aggressively. Highlights at the end of Q3 include increased liability and reduced equity, but the 3% decline is offset by a 3% reduction in the share count and otherwise healthy financial metrics. Regarding debt, the company’s leverage ratios are very low, with long-term debt running at less than 0.5x equity and total liability at less than 1x.
Analysts' sentiment trends are positive for Medtronic’s price action. The trends include increased coverage since the start of 2024, a high conviction in the Hold rating with 40% of the analyst ratings at Buy, and a 10% upside at the consensus price target. The consensus target is near $95 and has been steady at that level for several quarters, providing a realistic target for investors.
Medtronic Pulls Back Into the Buy Zone
Medtronic’s stock price action shows signs of reversal, including a Head & Shoulders pattern and rising support levels, but has yet to break out of its trading range. The market may continue to wind within this range until later in the year, but the bias is bullish because of growth, capital returns, and the analyst's sentiment. A move to the consensus target would put the market at a multi-year high and could be the trigger to unlocking a longer-term rally. Until then, investors can rely on the high yield, which is running near 3% with shares in the $85 to $90 range.
