During the early stages of the COVID-19 pandemic, one of the sectors of market that experienced major shifts in its business models was the Healthcare sector. The entire system – local clinics, hospitals, and more – has been forced for a large portion of the last two and a half years to shift its focus from regular operations, and even delay or defer things like elective procedures to deal with the massive demand imposed by the pandemic.
Public and market focus, especially since late 2021 has shifted away from COVID discussions and to other weighty matters, like inflation, interest rates, and the Russia-Ukraine war. Despite the Biden administration’s attempt this week to say the pandemic is over, the truth is that COVID still isn’t in our rear-view mirror. As previous years have attested, the arrival of the cooler months of the year suggests that yet another surge in infections could be coming. Even so, the lessons learned since 2020 have helped the Healthcare sector start to focus on bringing operations like elective procedures back while managing the demands imposed by COVID-19. That also means that the companies that supply the sector – including those that manufacture medical equipment – who were also forced to adapt to COVID-driven needs for equipment like masks, ventilators, and more, have also begun to turn attention back to the elements of their product portfolios that have been put aside or deferred, with high predicted demand for elective procedures and, therefore, the equipment and services to support them.
The Medical Specialities industry of the health care sector include medical equipment manufacturers and suppliers, who are generally considered to be pretty safe, defensive-oriented investments to think about making when economic conditions are difficult. In the current environment, with interest rates climbing, consumers are likely to have to curb discretionary spending – but that doesn’t mean that health care needs can take a back seat. For companies like Medtronic PLC (MDT), who adapted to meet demand for useful equipment to combat COVID, bringing their focus back to innovating new, useful devices for a variety of treatments methods should help them meet what many economists expect to be an increased demand for “traditional” healthcare products and solutions. MDT’s balance sheet has been resilient throughout the pandemic and continues to be a source of strength. The stock, however has experienced a downward trend that began at a peak in September of last year at around $136 and is finding new 52-week lows even as I write this.
For growth-oriented investors, that kind of drop usually means the stock is radioactive and shouldn’t even be considered for any kind of investment right now. For bargain hunters, however, the drop should automatically pique interest – especially if the stock is starting to stabilize around its recent low. If that is the case, there could be an argument to make that the stock could not only be in position to eventually reverse its downward trend, but also to offer a nice value-based opportunity for a patient investor. Let’s dive in to the numbers.
Fundamental and Value Profile
Medtronic Public Limited Company (Medtronic) is a medical technology and services company. The Company develops, manufactures and markets its medical devices and technologies to hospitals, physicians, clinicians and patients in approximately 160 countries. The Company operates in four segments: Cardiac and Vascular Group, Minimally Invasive Technologies Group, Restorative Therapies Group and Diabetes Group. The Cardiac and Vascular Group segment includes Cardiac Rhythm & Heart Failure, Coronary & Structural Heart and Aortic & Peripheral Vascula. Its Minimally Invasive Technologies Group segment includes Surgical Solutions and Patient Monitoring and Recovery. Its Restorative Therapies Group segment includes Spine, Neuromodulation, Surgical Technologies and Neurovascular. Its Diabetes Group segment includes Intensive Insulin Management, Non-Intensive Diabetes Therapies and Diabetes Services & Solutions. The Company’s subsidiaries include Medtronic, Inc. and HeartWare International, Inc. MDT has a current market cap of about $110.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -19.86%, while revenues were -7.7% lower. In the last quarter, earnings were -25.66% lower, while revenues also declined by -8.88%. MDT is a company that operates with a healthy, margin profile that has been pressured in the last quarter along with earnings; in the last twelve months, Net Income was 16.76% of Revenues, and decreased to 12.6% in the last quarter.
Debit/Equity: MDT’s debt to equity ratio is .33, which is conservative. Their balance sheet shows $8.8 billion in cash and liquid assets (down over the last six months, when this number was $11.2 billion, and $10.5 billion in the last quarter), with $17.5 billion in long-term debt (this number was around $20.5 billion one quarter ago, explaining at least a portion of the drop. Their operating profile is a strong indication that servicing their debt is no problem, however the decline over the last quarter is a concern that bears watching in the quarters ahead.
Free Cash Flow: MDT’s free cash flow is $5.7 billion over the last year. This number has been stable, from $5.77 billion over the past year, but did decline slightly, from $5.9 billion in the quarter prior. The current number translates to a current Free Cash Flow yield of 5.02%.
Dividend: MDT’s annual divided is $2.72 per share and translates to a yield of 3.17% at the stock’s current price. MDT has also increased its dividend payout over the last two years, from $2.32 in June of 2020.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $100 per share, which means that MDT is undervalued, with 20% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s downward trend over the last year from a September 2021 high around $131 to its low, reached today at around $84. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock appears to be breaking below its last support at around $86, marking immediate resistance at that level, and putting expected, current support at around $81 based on the distance between last support and resistance. A push above $86 could have upside to about $91, based on the stock’s pivot high last week in that price area, while a drop below $81 could see additional downside to about $76 per share.
Near-term Keys: MDT has some solid fundamental strengths, and an interesting value proposition that could make it useful as a long-term investing opportunity at its current price. The long-term trend, however is strongly bearish, with the broad market strongly bearish right now as investors digest the latest interest rate increase and concurrent Fed statement, which means that any decision to take advantage of the value proposition requires accepting the possibility of additional downside for the foreseeable future. If you prefer to work with short-term trades trading strategies, bearish trades offer the best probabilities right now. Treat a drop below $81 as an opportunity to short the stock or buy put options, with an eye on $76 as a practical profit target. If the stock pushes above $86, and you don’t mind being aggressive, you can also consider buying the stock or working with call options, using $91 as a realistic profit target on a bullish trade.