Following a series of recent product setbacks and disappointing financial results, Medtronic (MDT) , the broadly diversified med-tech company, has suffered a whopping 39% pullback off 2021 highs.
The shares have then languished, up a meager 6% year-to-date. The resolution of diabetes manufacturing issues had the share price looking up earlier this year, until softer-than-expected guidance in their recent earnings report sent shares careening back toward the lows. With this pullback in MDT, several analysts have highlighted a significant buying opportunity after a promising quarter and conservative guidance.
Due to mis-execution and operational inefficiencies, MDT shares are trading at a 20% discount to its med-tech large-cap peers vs. the prior 10-year average of 8%. Improved operational efficiency and a path to 4%-5% organic growth ought to narrow the discount.
Morgan Stanley upgraded MDT to outperform last week, replacing Boston Scientific (BSX) as "Top Pick," while raising the target to $104 from $88. Morgan cited MDT's restructuring of internal operations, reducing 13 supply companies to 2, which should drive more consistent performance. In a deep dive, MS's bottoms-up work shows four areas that could drive mid-teens earnings per share upside, potentially adding $5 billion-$6 billion to group sales longer term. Morgan Stanley sees potential upside from MDT's innovations in Neuromodulation, pulsed field ablation, leadless pacemakers, and circular and ultrasonic stapling.
Medtronic has suffered through years of supply chain issues, compounded by the pandemic and Ukraine war-related effects. But with the appointment of Greg Smith, former head of supply chain at Walmart (WMT) , Wall Street is gaining confidence that MDT can provide a platform for more consistent execution going forward.
After the earnings guidance-related pullback, Evercore ISI issued a rare "back the truck up" call. It sees fourth-quarter earnings as a clearing event and that it's time to become incrementally positive. It also sees first-quarter guidance as conservative, with the company positioned for upside guidance in fiscal 2024.
Granted, MDT has become a show-me story that will play out over the next year, with few investors heeding Evercore's call. Nonetheless, the parts are coming together for MDT as an aging population and China's reopening provide a med-tech sector tailwind.
MDT is not without risk, especially regarding operational execution. It's doubtful the stock can close a valuation gap if new supply chain challenges or Food and Drug Administration actions emerge. Improvements in MDT's diabetes franchise are expected, now that the FDA's actions have been cleared, so investors will be monitoring that business based on higher expectations. Next month, MDT plans to update its progress at a Diabetes Analyst and Investor briefing.
Since artificial intelligence is now an investor focus, one mention seems necessary: Medtronic is at the forefront of medical innovations, including collaborating with Nvidia (NVDA) to help bring AI to gastrointestinal physicians for detecting polyps and other conditions during colonoscopies.
Investors have been undoubtedly frustrated after three years of poor execution, ongoing currency headwinds, and product delays. But, with shares trading close to the lows with a 20% or more discount to peers, business at an inflection with conservative guidance, a 3.3% dividend yield with over 50% of free cash flow returned to shareholders, an undemanding 16 price-to-earnings valuation, and Wall Street ignoring operational improvements, the shares are a buy for longer-term investors.