A series of setbacks have knocked Medtronic (MDT) down 14% for the year, setting the stage for the stock to potentially outperform in 2022.
This year, the medical device company has faced headwinds from Covid, as elective surgeries get postponed and hospitals face continuing staffing woes. Also, a promising pipeline of products has fizzled. For example, a kidney procedure called renal denervation that is used to treat high blood pressure has seen delays; expected approvals for diabetes products got hit by a regulatory holdup; and supply chain problems are slowing the roll out of the Hugo surgical robot.
Making matters worse, a revenue miss last quarter has helped force management to reevaluate its ambitious growth targets. No doubt, the story grew hair this year, but it's fully discounted in the share price, 25% off the high.
Wall Street had high hopes for Medtronic, both because of pent-up demand as the pandemic was believed to wind down, and because of the company's strong innovation cycle ahead. After a few bumps in the road, however, expectations are near rock bottom.
Spending on research and development, however, has been up significantly, at the highest in the company's history, to bolster its pipeline and competitive position. Medtronic has launched 180 new products worldwide in the past year. Any positive developments for demand in its core businesses or rejuvenation of the pipeline will likely have an outsized impact on the stock.
Furthermore, Medtronic holds a solid competitive position and has seen improving market share in areas such as cardiac rhythm management, which includes pacemaker and implantable cardioverter-defibrillator devices and products; neuroscience technology; pelvic and spine treatments; respiratory therapies; and gastrointestinal and kidney health. The company is also known for its innovative surgical technology.
But on the other hand, the company has lost market share in diabetes care, which will likely continue down after the Food and Drug Administration issued a manufacturing warning, delaying product approvals. Still, Medtronic believes it stands to gain market share after the MiniMed 780G System gains FDA approval. The system automatically adjusts insulin delivery based on continuous glucose monitoring (CGM) values, which has some competitive advantages. This week, the federal Centers for Medicare & Medicaid Services expanded Medicare coverage to include CGMs that integrate with MDT pumps. Nonetheless, Wall Street has lost patience, dropping the stock 10% after the FDA warning. Investors are concerned that the warning letter will slow the U.S. approval timing for Medtronic's diabetes pipeline products.
Also, uncertainty around the slow rollout of, and share capture of, Medtronic's surgical robotic business has weighed on shares. Hugo is designed to compete with Intuitive Surgical's (ISRG) DaVinci device, but purchases of the surgical robot by hospitals had a slow start, lower than initial Street estimates.
Capital return has been a priority, returning over 50% of free cash flow to shareholders through buybacks and a dividend yield of 2.5%. Management has committed to increasing annual dividend payouts.
Two of the top market strategists, Tom Lee and Mike Wilson, have suggested that defensive large-cap stocks, especially in health care, will outperform in the upcoming year. Medtronic has a below-market multiple of 17 and will likely continue to grow earnings 6% to 8% annually on organic revenue growth close to 5%. The free cash flow yield this year of 4% exceeds its cardiac competitors, Abbott Labs (ABT) , Boston Scientific (BSX) , and Edwards Lifesciences (EW) . The relatively low valuation in a potentially strong medtech industry could be a good combination for share outperformance.
With a strong focus on innovation and taking share in key markets while continuing to invest in new areas, Medtronic has a bright future. Investors have thrown in the towel on the stock in the last few months, creating a buying opportunity in a medtech leader.