Can I Buy Medtronic Stock Now?
Every long-term investor should have at least some healthcare stocks in their portfolio. People will always need care, and the industry is constantly looking for new and better ways to provide it. Medtronic (MDT 0.19%) It has been a long-standing staple in the healthcare sector, as evidenced by its long history and 46 consecutive years of dividend growth.
The stock has outperformed the broader market over the entire period, but is still nearly 40% off its high today. Is this a decline worth buying, or is Medtronic’s business losing its luster? This idiot did some research to find out. Here’s what I found:
Headwinds are eating into profit growth.
Medtronic provides medical devices, equipment and supplies globally. The United States, the world’s largest medical market, accounts for about half of Medtronic’s sales. The remainder comes from developed and emerging international markets. The pitfall of global markets is that Medtronic, which reports its finances in U.S. dollars, must convert its international revenues into dollars. Unfavorable exchange rates may underestimate Medtronic’s reported profits.
The company recently reported its second quarter fiscal 2024 results. Earnings per share (EPS) were $1.25, down 3.8% from the previous year. Excluding the impact of exchange rates, EPS increased by 2.3% compared to the previous year.
Inflation also reduced gross margin by a few percentage points in the most recent quarter, something management noted in its most recent earnings call. The downside to doing business in emerging markets is that they typically don’t have the luxury of spending as much as developed countries. Therefore, Medtronic cannot afford to raise prices and offset rising costs, as it does for its U.S. customers.
These headwinds have derailed growth estimates and appear to be the cause of Medtronic’s stock price problems. And to be honest, be fair. Medtronic is feeling these headwinds on the revenue side. The question for investors is whether the business is broken or just a passing storm.
MDT data from YCharts.
Basics intact but weakened
Medtronic can’t do much to control the impact of currency exchange on its business. You can beat inflation by cutting costs and raising prices. So these headwinds appear to be more temporary than anything else. This is especially true if Medtronic achieves mid-single-digit revenue growth.
But headwinds have weakened Medtronic’s financials, which investors should keep an eye on. The most notable thing is the decline in free cash flow. The decline has pushed the company’s dividend payout ratio to about 90%, giving management room to do things like pay down debt on a balance sheet that holds nearly three times more debt than earnings before interest, taxes, depreciation and amortization. There is very little left (Evita).
MDT free cash flow data from YCharts.
do not misunderstand. Investors should not panic. Medtronic remains a financially stable company. The corporate rating agency gives Medtronic an A rating and a stable outlook, making it comfortably investment grade. The biggest concern is Medtronic’s current lack of financial flexibility. It’s not a crisis, but we want lower payout ratios and cleaner balance sheets.
Are you buying Medtronic now?
Looking for a quick rebound and profits from Medtronic? Pump the brakes. The company’s slowing growth and worsening financials justify the stock price decline. These headwinds will have to pass for the stock to bounce back.
The good news is that the stock trades at a forward price-to-earnings ratio of 16x, down from 24 years ago. If Medtronic can accelerate its revenue growth by close to 10%, today’s valuation could be very cheap. Medtronic doesn’t seem like a broken business, but it’s struggling financially due to what it can’t do at the moment.
If you’re a long-term investor looking to buy in and wait for a recovery, you might want to buy Medtronic today. However, since it is difficult to predict when the situation will improve, this does not seem to be an opportunity that cannot be missed.
