Medtronic (MDT) released its fourth-quarter earnings on Thursday and revealed an earnings target miss of 4 cents per share amid concerns of supply-chain congestion. Medtronic also missed its revenue target by $340 million, as it experienced a 1.2% year-over-year reduction in its top-line revenue.
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Medtronic’s CEO, Geoff Martha, remains optimistic about the firm’s prospects. According to Martha: “We understand the root causes, we’re addressing them, and we expect them to resolve over the near-term.”
Although Medtronic let down its investors with its fourth-quarter earnings, I’m bullish on the stock, as I think it’s an underappreciated asset.
Quarterly Highlights
Medtronic achieved a few critical operational targets despite missing its quarterly earnings estimate.
During the past quarter, Medtronic’s cardiovascular division posted year-over-year revenue growth worth 5% due to success in its Cardiac Rhythm and Cardiac Health business units.
Furthermore, progress in specialty therapies and neuromodulation offerings saw Medtronic’s neuroscience department extend its top-line revenue 2% year-over-year.
Medtronic recently experienced a few setbacks, predominantly caused by supply chain issues in China. According to Medtronic, supply-chain shortfalls in China dampened the potential of its medical-surgical and diabetes departments.
It’s likely that the market will price a “post-China lockdown” scenario soon. Medtronic has a solid supply chain, and transitory lockdowns won’t necessarily dampen the company’s long-term prospects.
Systemic Support
Medtronic could garner systemic support in the near future. The stock market is clearly disrupted by volatility due to contractionary monetary policy. Consequently, the healthcare sector could outperform most of the other sectors because of its non-cyclical properties.
TipRanks’ sector consensus indicator conveys that the health care sector has earned the third most Moderate Buy ratings by Wall Street analysts, providing reassurance that it’s a safe sector to be invested in.
Furthermore, Medtronic possesses idiosyncratic features that could carry it through a challenging market environment. First of all, the company has achieved economies of scale, which is illustrated by its 68.3% gross profit margin.
By achieving economies of scale, a company is able to outprice its competitors and maintain bargaining power over its suppliers. Thus, a firm with economies of scale has the ability to outperform the broader market during challenging economic times.
Another positive for Medtronic’s stock is the company’s robust income statement. Medtronic generates a net income per employee of $54,600, suggesting that it’s able to withstand rising input costs. Companies that can deflect rising input costs are a big attraction to investors in the current inflationary economic environment.
Dividend Payout
After reporting earnings, Medtronic increased its quarterly dividend by 8%, conveying management’s confidence in the company’s longer-term prospects.
Dividend increases aren’t just a sign of a shareholder-driven management team but also an indicator of future financial prospects. Thus, an increase in dividend after an earnings miss provides much reassurance to investors.
The company offers a lucrative dividend, at a forward yield of 2.58%. Medtronic’s dividend yield falls within the TipRanks dividend yield range tool, indicating that its sustainability isn’t of any concern.
Lastly, Medtronic exhibits high-quality dividend safety ratios, as the stock’s dividend coverage ratio of 2.34x is accompanied by a cash-per-share ratio of 2.6x.
Valuation Metrics
Quantitative metrics suggest that Medtronic isn’t priced in by the market. The stock’s current price-to-cash-flow ratio, relative to its five-year average, is undervalued by 6% on a normalized basis. Its price-to-earnings ratio is also 12.8% undervalued relative to its five-year average, suggesting that the stock is undervalued on both a cash and accrual basis.
Wall Street’s Take
Turning to Wall Street, Medtronic earns a Moderate Buy consensus rating based on eight Buys and six Hold ratings assigned in the past three months. The average Medtronic stock price target of $119.31 implies 25.16% upside potential.
Concluding Thoughts
Medtronic’s earnings miss doesn’t embody its true potential. Transitory supply-chain issues caused unforeseen obstacles. Nonetheless, the firm still progressed in most of its key segments.
Systemic considerations and quantitative metrics suggest that the stock is undervalued, and its dividend offering certainly isn’t flawed. Medtronic stock is set up for future growth.
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