Will Medtronic Stock Rebound To Its Pre-Inflation Shock Highs?

Medtronic stock (NYSE: MDT) currently trades at $87 per share, roughly 27% below its level in March 2021, and it has the potential for sizable gains. MDT saw its stock trading at around $90 in late June 2022, just before the Fed started increasing rates, and is now 3% below that level, underperforming the broader markets, with the S&P 500 rising 16% over this period. The decline in Medtronic stock over the recent past can be attributed to its downbeat guidance for fiscal 2024. It expects its earnings to be between $5.00 and $5.10 on a per-share and adjusted basis, compared to expected EPS of around $5.20. At the mid-point of the provided range, this reflects a 5% cut from its $5.29 figure reported in fiscal 2023. This did not sit well with the investors.

Returning to the pre-inflation shock level means that Medtronic stock will have to gain 56% from here. However, we do not believe that will materialize any time soon and estimate Medtronic’s valuation to be around $93 per share, implying about 7% gains. This is because of an expected decline in earnings in the near term. Moreover, the recent uncertainty in the financial sector has raised concerns about a potential recession, which may impact Medtronic’s business.

Our detailed analysis of Medtronic’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how MDT stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Medtronic and S&P 500 Performance During 2007-08 Crisis

Medtronic stock declined from $58 in September 2007 (pre-crisis peak) to around $30 in March 2009 (as the markets bottomed out), implying MDT stock lost nearly 50% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $44 in early 2010, rising nearly 49% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Medtronic’s Fundamentals Over Recent Years

Medtronic’s revenue rose from $30.6 billion in 2019 to $31.2 billion in 2023. Although Medtronic’s sales were hurt during the pandemic due to the postponement of elective surgeries, this trend reversed in 2022, resulting in a rebound in sales. The company also benefited from its new product launches, including the Micra AV pacemaker. However, of late, its Medical Surgical segment sales have been weighed down due to a continued decline in ventilator demand. Furthermore, forex headwinds have also weighed on the overall top-line growth in recent quarters.

Medtronic’s operating margin slid from 20.5% in 2019 to 18.7% in 2023. Its EPS also declined from $3.44 to $2.83 over this period.

Does Medtronic Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Medtronic’s total debt decreased from $25.3 billion in 2019 to $24.4 billion in 2023, while its total cash decreased from around $9.8 billion to $8.0 billion over the same period. The company garnered $6 billion in cash flows from operations in 2023. Given its cash position, Medtronic appears to be in a comfortable position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Medtronic (MDT) stock has the potential for some gains once fears of a potential recession are allayed. That said, the expected decline in near-term earnings, partly due to the higher inflation and foreign currency translation, remains a risk factor to realizing these gains.

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[1] Month-to-date and year-to-date as of 6/30/2023
[2] Cumulative total returns since the end of 2016