Over the last three years, one of the sectors of market that experienced major shifts in its business models was the Healthcare sector.
Every facet of the entire system, it seems, from local clinics, to hospitals, and more was forced to shift its focus through practically all of 2020 and 2021 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 saw health experts begin 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 has fallen from a high in April of last year at around $114.50 to find its 52-week low point at around $76 in December. After rallying temporarily into the beginning of February, the stock dropped back again to retest that yearly low in March, and is now sitting at around $80 as of this writing.
For growth-oriented investors, that kind of drop usually means the stock is radioactive and should be avoided at all costs. 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 is an argument to make that the stock could setting up not only for an eventual reversal of 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 $105.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by about -5.11%, while revenue growth was flat, but slightly negative, at -0.46%. In the last quarter, earnings growth was exactly 0%, while revenues increased by about 1.9%. MDT is a company that operates with a healthy margin profile; in the last twelve months, Net Income was 13.21% of Revenues, and strengthened to 15.83% in the last quarter.
Debit/Equity: MDT’s debt to equity ratio is .43, which is conservative. Their balance sheet shows $11.2 billion in cash and liquid assets, with $22.2 billion in long-term debt. Their operating profile indicates that servicing their debt is not a problem. It’s also worth noting that three quarters ago, cash was around $8.9 billion dollars.
Free Cash Flow: MDT’s free cash flow is $4.16 billion over the last year. This number has dropped from $5.9 billion over the past year, and $4.8 billion in the quarter prior. The current number translates to a modest Free Cash Flow yield of 3.88%.
Dividend: MDT’s annual divided is $2.72 per share and translates to a yield of 3.37% at the stock’s current price. MDT has also increased its dividend payout over the last three 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 $96 per share, which means that MDT is undervalued, with 21% 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 its April 2022 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 rallied to a temporary peak at around $87.50 at the start of February before dropping back to retest its 52-week low. The stock has been hovering since that retest in a range between current support at around $78.50 and immediate resistance at $81. A push above $81 should have short-term upside to rally to between $83 and $84 before finding next resistance, while a drop below $78.50 will see a retest of the stocks yearly low at around $76.
Near-term Keys: MDT has some solid fundamental strengths, an interesting value proposition and a consolidation pattern that I think make it useful as a long-term investing opportunity at its current price. The long-term trend is strongly bearish, which means that any decision to take advantage of MDT’s fundamental strength and value proposition requires accepting the possibility of additional downside for the foreseeable future. If you prefer to work with short-term trading strategies, a push above $81 could act as a good signal to buy the stock or to work with call options, with $84 acting as a practical exit target on a bullish trade. A drop below $78.50, on the other hand, could be a good opportunity to consider shorting the stock or buying put options, using the stock’s 52-week low at around $76 as a practical, bearish profit target.