What’s Next For Medtronic Stock After An Upbeat Q1?

Medtronic (NYSE: MDT) recently reported its Q1 fiscal 2025 results (fiscal ends in April), with revenues and earnings exceeding our estimates. The company reported revenue of $7.9 billion and adjusted earnings of $1.23 per share, compared to our estimates of $7.9 billion and $1.21, respectively. The company continued to benefit from increased adoption of its new products, including MiniMed 780G and Evolut FX, among others. MDT stock is up 5% in a week, bolstered by an upbeat quarter.

Looking at a slightly longer term, MDT stock has seen a decline of 20% from levels of $105 in early January 2021 to around $85 now, vs. an increase of about 50% for the S&P 500 over this period. Notably, MDT stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -10% in 2021, -23% in 2022, and 10% 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 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, we think it is appropriately priced. We estimate Medtronic’s Valuation to be $88 per share, close to its current market price of $85. Our forecast is based on 16x expected earnings of $5.44 in 2025. The 16x figure aligns with the stock’s average P/E ratio over the last three years.

Medtronic’s revenue of $7.9 billion in Q1 was up 3% y-o-y, partly due to higher sales of its MiniMed 780G systems, which anticipates and automatically adjusts insulin delivery. Looking at segments, the Neuroscience segment saw 4.4% growth, Cardiovascular sales were up 5.5%, Medical Surgical down 0.4%, and Diabetes sales were up 11.8% year-over-year. Medtronic’s adjusted operating margin slid 40 bps to 24.4% in Q1. Medtronic’s bottom line of $1.23 on an adjusted basis was slightly above the $1.20 figure it reported in the prior-year quarter. Looking forward, Medtronic expects its sales to rise between 4.5% and 5%, and its adjusted earnings to be in the range of $5.42 and $5.50 in fiscal 2025. This compares with its prior guidance of 4% to 5% sales growth and an EPS range of $5.40 to $5.50.

The company also secured the U.S. FDA approval for its CGM device — Simplera. However, it has also partnered with Abbott to use its sensors that will integrate with Medtronic’s pumps and automated insulin delivery systems. The aim is to offer Abbott’s large installed base access to Medtronic’s technology. Overall, Medtronic appears to be benefiting from its new products and the diabetes segment will likely continue to drive the sales growth in the near term. Still, with its stock already trading at 16x forward expected earnings, we think investors will likely be better off waiting for a dip for robust long-term gains.

While MDT stock looks like it is appropriately priced, 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 8/21/2024
[2] Cumulative total returns since the end of 2016