Can Medtronic Be Rescuscitated as Pandemic Fears Fade?

Medtronic’s (NYSE: MDT) recovery was hampered earlier this year as the surge in Omicron cases impacted elective procedure volumes. That said, the medical devices company is optimistic about the road ahead.  

From stents to glucose monitoring devices, Medtronic has an extensive portfolio of products and solutions under four segments – Cardiovascular, Medical-Surgical, Neuroscience, and Diabetes.

Medtronic’s Q3 FY22 (ended January 28, 2022) revenue of $7.8 billion was essentially flat year-over-year and lagged the Street’s expectation of $7.9 billion, reflecting COVID-19 headwinds and the impact of labor shortages on medical device procedure volumes, primarily in the U.S. Adjusted EPS grew 6.2% to $1.37 and was in line with analysts’ estimates.  

Improvements Expected in Q4

Medtronic expects Q4 FY22 organic revenue growth of 5.5% compared to the 2% organic growth seen in Q3, reflecting expectations of improved procedure volumes through March and April. Further, it anticipates returning to pre-pandemic levels in most of its markets before the end of Q4 FY22.

Meanwhile, Medtronic expects weakness in its Diabetes business to continue in Q4. The company faced a setback when the FDA issued a warning letter in December 2021 highlighting “the inadequacy of specific medical device quality system requirements” at its diabetes business headquarters. On the Q3 conference call, the company stated that it is focused on resolving the issues and bringing new products to the U.S. market, “although timing is difficult to predict.”

Nonetheless, Medtronic continues to focus on enhancing its product pipeline and launched over 200 products in the U.S., Western Europe, Japan, and China over the last 12 months.

Analysts Weigh In

Last month, Bank of America Securities analyst Travis Steed reinstated coverage on Medtronic with a Buy rating, stating, “With estimates reset for FY23 we see little downside risk to estimates and a company with MDT’s mid-single digit growth profile with exposure to the elective recovery could trade around 22x EPS a year from now, in our view, suggesting around 30% upside.”

Steed noted that while Medtronic’s pipeline recently faced a few setbacks, he feels that at the current valuation, this pipeline is not being properly valued by the Street, suggesting some “upside optionality” if the pipeline does yield positive results.

Steed assigned a price target of $135 (22.22% upside potential) to MDT stock.

The Street is cautiously optimistic, with a Moderate Buy consensus rating based on 10 Buys and five Holds. The average Medtronic price target of $125.36 implies upside potential of 13.49% from current levels. Shares have advanced 6.8% so far this year.

Conclusion

Medtronic is set to bounce back, provided there are no significant cancellations or postponements of elective procedures due to COVID-19. The company’s extensive product portfolio and robust pipeline are expected to drive further growth, although the FDA’s warning letter is a matter of concern over the near term.

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