Why Abbott Stock Looks More Attractive Than Its Medical Devices Peer

Given its better prospects, we believe Abbott stock (NYSE: ABT) is a better pick than its peer Medtronic stock (NYSE: MDT). ABT stock trades at 4.9x trailing revenues, versus 3.6x for MDT. Although Medtronic is slightly more profitable, Abbott has seen superior revenue growth and has a better financial position, largely explaining this valuation gap. There is more to the comparison, and in the sections below, we discuss why we think Abbott will outperform Medtronic in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. Returns For ABT Stock Have Been Better Than For MDT

ABT stock has witnessed gains of 15% from levels of $100 in early January 2021 to around $115 now, while MDT stock has seen a decline of 15% from $105 to $90 over this period. This compares with an increase of about 50% for the S&P 500 over this roughly four-year period.

However, the changes in ABT and MDT stock have been far from consistent. Returns for ABT stock were 31% in 2021, -21% in 2022, and 2% in 2023, while for MDT stock were -10%, -23%, and 10%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that ABT underperformed the S&P in 2022 and 2023 while MDT underperformed the benchmark index each year.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including JNJ, UNH, and PFE, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

2. Abbott’s Revenue Growth Is Slightly Better 

Abbott has seen its revenue rise at an average annual growth rate of 5.9% from $34.6 billion in 2020 to $40.1 billion in 2023. On the other hand, Medtronic has seen its sales rise at an average rate of 2.5% from $30.1 billion in fiscal 2021 (fiscal ends in April) to $32.4 billion in fiscal 2024.

A high demand for Covid-19 testing drove Abbott’s sales growth during the pandemic phase. Sales declined in 2023 amid lower testing demand. Despite the impact of lower testing, Abbott is poised to return to growth this year, driven by its medical devices business. Abbott reports its sales under four segments – Established Pharmaceuticals, Medical Devices, Diagnostics, and Nutritional. For the six-months period ending June 2024, medical devices sales grew 12% y-o-y, established pharmaceuticals sales were up 2%, nutritional sales were 4% and diagnostics sales were down 12%. Sales for the Medical Devices segment are being bolstered by a rise in procedure volume. Within medical devices, diabetes sales have been seeing double-digit growth lately, led by FreeStyle Libre. The nutritional segment is benefiting from market share gains for its baby formula products. Abbott expects its total 2024 revenue to rise 9.5% to 10% on an organic basis.

Medtronic has also benefited from an overall rise in procedure volume. Its new products – including the Micra AV pacemaker and Abre venous self-expanding stent system for Deep Venous disease – have done well. The company’s MiniMed 780G system, which anticipates and automatically adjusts insulin delivery, has been driving the diabetes sales growth. Medtronic reports its revenue under four segments – Cardiovascular, Medical Surgical, Neuroscience, and Diabetes. It recently reported its Q1 fiscal 2025 results, with revenue of $7.9 billion, up 3% y-o-y. The neuroscience segment saw 4.4% growth, cardiovascular sales were up 5.5%, medical surgical sales were down 0.4%, and diabetes sales were up 11.8% year-over-year.

Our Abbott Revenue Comparison and Medtronic Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, we think Abbott will see better revenue growth than Medtronic in the next three years. While it will continue to see increased sales for its medical devices and nutritional products, the diagnostics business will also have a better comparison going forward, with the impact of falling Covid-19 testing sales mostly behind us.

3. Medtronic Is Slightly More Profitable 

Abbott’s operating margin has expanded from 15.5% in 2020 to 16.2% in 2023, while Medtronic’s operating margin grew from 16.3% to 17.1% over the last three years. Looking at the last twelve-month period, Medtronic’s operating margin of 17.1% fares slightly better than 15.9% for Abbott.

4. Abbott Fares Better In Terms of Financial Risk

Looking at financial risk, we believe Abbott has an edge over Medtronic. Its 7% debt as a percentage of equity is much lower than 22% for Medtronic, and its 10% cash as a percentage of assets is slightly higher than 9% for the latter. This implies that Abbott has a better debt position and more cash cushion.

5. The Net of It All

We see that Abbott has seen better revenue growth and offers lower financial risk. On the other hand, Medtronic is more profitable. Now, looking at the prospects, we believe Abbott is the better choice of the two. At its current levels, ABT stock is trading at 23x its expected earnings of $4.68 per share in 2024. The 23x figure is slightly below the stock’s average P/E ratio of 24x over the last three years. In comparison, Medtronic stock is trading at 16x its expected earnings of $5.44 in fiscal 2025. The 16x figure aligns with the stock’s average P/E ratio over the last three years. This implies that ABT stock has some room to grow, while Medtronic stock looks appropriately priced, in our view.

While ABT may outperform MDT in the next three years, it is helpful to see how Abbott’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 8/30/2024
[2] Cumulative total returns since the end of 2016

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