Why This Value Stock Could Be a Surprise Low-Risk Winner
This top med-tech company is poised to outperform in the quarters to come.
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In a market flush with speculation, buying a value stock that’s been treading water can seem boring and unproductive. But Medtronic MDT appears a possible exception. The medical device name offers investors a value proposition, trading at a 25% discount to the market multiple at a 15-times price-to-earnings; a 3.2% dividend; and growth and efficiency execution on the cusp of appreciation.
One of the largest medical device companies, Medtronic recently reported a solid quarter with 5% organic growth but earnings per share was up only 1% to $1.26 in a slight beat and raise quarter. The device maker produced above-consensus growth in three out of four segments: cardio, neuroscience, and diabetes. Naturally, Wall Street yawned and sent the shares down around 3%, disappointed that more of the revenue beat didn’t fall to the bottom line with expanded margins. Currency headwinds were a challenge to EPS growth. Nonetheless, with a handful of new products and execution improving, steady growth should continue unabated.
MDT is a value stock but not a “value trap,” although it has been churning in a range for 2.5 years. The reasons it has vastly underperformed are evident, including concerns about the impact GLP-1 drugs will have on its diabetes and weight-loss surgery businesses, inconsistent execution, delays in Food and Drug Administration approvals, and slow margin improvements.
Nonetheless, Morgan Stanley has a target of $98 for the stock, as it sees an encouraging catalyst pathway ahead, with a focus on innovation into next year.
“We think that the strong underlying growth excluding FX, return to high-single-digit growth in the second half, and positive catalyst pathway continue to make MDT a compelling investment case,” wrote Morgan Stanley analysts.
Boston Scientific BSX has been the runaway winner in the med-tech group — which I recommended in 2022 at less than half its current price — but it’s gotten expensive. BSX has half the revenues of MDT but trades at a higher market cap and more than twice the price-to-earnings.
The opportunity for investors in MDT is for a 20% p/e multiple expansion from the 15s back to the 18s, accompanied by high single-digit earnings growth. Even with a steady p/e under 16, next year can see the stock rise by 8% if they hit earnings targets. Since the stock is inexpensive and under-owned, multiple expansion can add to gains when Wall Street appreciates the growth from innovation and improved efficiencies across the company. Pocketing the 3.2% dividend can help make for a solid, low-risk winner.
Medtronic is an under-appreciated dividend aristocrat, with 46 years in a row of dividend increases, and a solid pipeline of innovative products. The stock has become a show-me story after significant market underperformance, with investors reluctant to jump aboard. However, business momentum is building and if they come through with expectations of operating margin expansion in 2025 with continued operational efficiencies and product launches, MDT is one to own in the mid $80 for a move over $100.
At the time of publication, Ginesin is long MDT, short MDT calls
