Is MDT radioactive, or a big bargain?

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 – had to conform to the mass amount of patients, making the sector consider several alternatives.

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. That doesn’t mean COVID is in our rear-view mirror; in fact, new forecasts suggest a new wave of infections could be coming in the fall. 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.

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 through 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 found a new, 52-week low in June at around $87.

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 seekers, 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 $118.7 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased slightly, by 1.33%, while revenues were -1.21% lower. In the last quarter, earnings were almost 11% higher, while revenues increased by 4.2%. MDT is a company that operates with a healthy, strengthening margin profile; in the last twelve months, Net Income was 15.91% of Revenues, and increased 18.37% in the last quarter.

Debit/Equity: MDT’s debt to equity ratio is .39, which is conservative. Their balance sheet shows $10.5 billion in cash and liquid assets (down from the last quarter, when this number was $11.2 billion), with $20.3 billion in long-term debt. Their operating profile is a strong indication that servicing their debt is no problem.

Free Cash Flow: MDT’s free cash flow is $5.9 billion over the last year. This number has been stable, with a modest increase over the last year, from $5.8 billion. The current number translates to a current Free Cash Flow yield of 4.96%.

Dividend: MDT’s annual divided is $2.72 per share and translates to a yield of 3.03% 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 $103 per share, which means that MDT is modestly undervalued, with about 15% 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 $136 to its low last month at around $87. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. From that recent low, the stock could be in the early stages of a consolidation pattern, with current support at the low around $87 and immediate resistance at the stock’s peak earlier this week around $91. A push above $91 could have upside to about $95 before finding next resistance, while a drop below $87 should find next support at around $83.

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, which mean 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 $87 as an opportunity to short the stock, with a near-term eye on $83 as a quick profit target. If the stock pushes above $91, and you don’t mind being aggressive, you can also consider buying the stock or working with call options, using $95 as good profit target for a bullish trade.