With Less Than 10% Contribution To Sales How Important Is The Diabetes Segment For Medtronic Stock?

Medtronic’s (NYSE: MDT) diabetes segment, which sells insulin pumps, continuous glucose monitoring (CGM) systems, and consumables has seen its revenue rise at a slower pace of 1.4% annually from $2.4 billion in fiscal 2020 (fiscal ends in April) to $2.5 billion in fiscal 2024. The slower growth can be attributed to unfavorable currency translation, given that over 60% of the segment sales are derived from markets outside the U.S. However, we think the company will see a pickup in diabetes sales going forward. The U.S. FDA approved the MiniMed 780G insulin pump system with Guardian 4 Sensor in April 2023, which will likely bolster the segment sales. The new system features meal detection technology, and it autocorrects sugar levels every five minutes. 

Diabetes accounts for only 8% of the company’s total sales. Medtronic supplies self-manufactured medical devices and therapies to treat several chronic diseases across 150 countries in the world. Medtronic operates in the following broad segments — Cardiovascular, Neuroscience, Medical Surgical, and Diabetes. Its main competitors are Johnson & Johnson, Boston Scientific, and Abbott. Our dashboard – How Does Medtronic Make Money – has more details on segments.

Cardiovascular is the largest segment for Medtronic, accounting for 37% of the company’s total sales. This segment, which includes Cardiac Rhythm & Heart Failure, Structural Heart & Aortic, and Coronary & Peripheral Vascular, has seen its revenue rise at an average annual rate of 3.6% from $10.5 billion in fiscal 2020 to $12.1 billion in fiscal 2024. Looking at other segments, Medical Surgical accounts for 29% and Neuroscience for 26% of the company’s total sales.

Medtronic’s overall sales have risen at a 2.9% average annual rate since fiscal 2020. This has been a slower growth compared to some of its peers, with Boston Scientific seeing its revenue grow at an average rate of 12.7% annually in the past four years. Not only did Medtronic see slower sales growth, its operating margin also declined slightly from 16.6% in fiscal 2020 to 15.9% in fiscal 2024, weighing on overall earnings growth. This did not bode well for its stock as well. MDT stock has faced a notable decline of 25% from levels of $115 in early January 2021 to around $85 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period.

Notably, MDT stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -12% in 2021, -25% in 2022, and 6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that MDT underperformed the S&P in 2021, 2022, and 2023. 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 LLY, UNH, and JNJ, 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.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MDT face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, MDT stock appears to have little room for growth. We estimate Medtronic’s Valuation to be $93 per share, reflecting an upside of over 10% from its current levels of $83. MDT stock currently trades at 15x expected earnings of $5.46 per share in 2025, slightly lower than its 16x average over the last three years.

Overall, we think some of Medtronic’s segments, including Diabetes, will see a pickup in growth in the coming years. The company should continue to benefit from an increased procedures volume and expansion of its new products, including the Micra AV pacemaker and the increased adoption of its MiniMed 780G insulin system. However, much of the positives appear to be priced in, and we think MDT stock has little room for growth.

While MDT stock looks like it has little room for growth, it is helpful to see how Medtronic’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/5/2024
[2] Cumulative total returns since the end of 2016

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