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.
For the last three years, the entire system – local clinics, hospitals, and more – has been forced 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 war between Russia and Ukraine and its global impact. No matter how much folks want to put COVID in the rear-view mirror, however the truth is that COVID is still very much a thing. As previous years have attested, the advent of the cold months of the year once again has health experts sounding the warning bell about increasing infection rates not only for COVID but other respiratory illnesses. 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 associated with COVID-19 and the rise of new, infectious variants. 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 includes 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 treatment 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 to find its 52-week low point at around $76 in December. The stock has rallied from that point, but is still about -30% below its 52-week high.
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 tends to 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 be in position not only 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 $105.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by about -1.5%, while revenues were -3.34% lower. In the last quarter, earnings were 15% higher, while revenues also increased by 2.9%. 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 14.03% of Revenues, and decreased to 5.63% in the last quarter.
Debit/Equity: MDT’s debt to equity ratio is .40, which is conservative. Their balance sheet shows $11.4 billion in cash and liquid assets, with $20.7 billion in long-term debt. Their operating profile indicates that servicing their debt is not a problem, however the decline in Net Income over the last quarter is a continuation of a negative pattern over the last two quarters, and as such is an increasing concern that bears monitoring in the quarters ahead.
Free Cash Flow: MDT’s free cash flow is $4.8 billion over the last year. This number has dropped from $5.67 billion over the past year, and $5.7 billion in the quarter prior. The current number translates to a modest Free Cash Flow yield of 4.52%.
Dividend: MDT’s annual divided is $2.72 per share and translates to a yield of 3.39% 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 $94 per share, which means that MDT is undervalued, with 18% 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 from an April high at around $114 to its low, reached in early December at around $76. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock has rallied from that low, marking current support at around $78 based on pivot activity in the latter part of December, and immediate resistance at around $82 based on pivot lows seen in October, and more recently at the start of this month. The distance between current support and immediate resistance are also starting to form a consolidation range for the stock, which could be a good, early indication the stock’s long-term downward trend is in a good position to begin a bullish reversal. A push above $82 should see near-term upside to about $85 before finding next resistance, with additional upside to about $88 if buying activity increases. A drop below $78 should retest the stock’s 52-week low at around $76.
Near-term Keys: MDT has some solid fundamental strengths, an interesting value proposition and a developing consolidation pattern that could make it useful as a long-term investing opportunity at its current price. I do think the declining Net Income pattern is a concern, however that suggests a cautious eye on increasing risk is appropriate. The long-term trend is strongly bearish, 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 trading strategies, the stock’s proximity to its 52-week low actually makes a bearish trade a low-probability, low-reward prospect. The best signal would come from a push above $82; in that case, consider buying the stock or working with call options, using $85 as a realistic profit target on a bullish trade.