Stock Experiencing a 6% Decrease, Consider Purchasing at Current Price
In the stock market, you'll find various components, and one of these is investing styles. Two primary styles are growth and value stocks. Recently, growth stocks have been gaining investor attention, and the Russell 3000 Growth Index returned an impressive 39.8% over the last year, significantly surpassing the Russell 3000 Value Index with a meager 14.8%.
One company that has underperformed in this context is Medtronic, whose share price dropped 5.6% during the same period. Including dividends, Medtronic's return was only a negative 2.4%. Despite this disappointing performance, I'm optimistic about Medtronic's long-term prospects.
Growing and Adapting
Medtronic has an impressive history, having launched the first battery-operated pacemaker nearly 75 years ago. Today, the company generates over $30 billion in annual sales. The revenue has been steadily increasing, with a top-line growth across all four of its businesses (cardiovascular, neuroscience, medical surgical, and diabetes) in the latest quarter.
In the fiscal second quarter, Medtronic's adjusted revenue rose 5% to $8.3 billion. The earnings per share also grew 8%, albeit not impressively. However, these numbers provide reason for optimism that this growth could accelerate further.
Neuroscience at the Forefront
Medtronic's neuroscience division is a significant contributor to the company's growth. This division, which accounts for 29% of the company's top line, is driven by a range of specialist physicians, such as spinal surgeons, neurologists, and orthopedic surgeons.
The division's revenue growth has accelerated recently, with adjusted second-quarter revenue increasing 6.7% to $2.3 billion. This growth is driven by the adoption of spinal implants, neuromodulation products like spinal cord stimulation and brain modulation for treating Parkinson's symptoms, and implantable drug infusions for chronic pain. Medtronic has several products, such as AiBLE and Percept, that have been gaining traction.
Diabetes on the Rise
Although it's the smallest business (around 8% of quarterly revenue), Medtronic's diabetes segment has been growing the fastest. In the latest quarter, adjusted revenue grew 11% to $686 million. This growth is expected to continue as type 1 and type 2 diabetes continue to impact people.
Medtronic's solutions in this segment, such as MiniMed, InPen, and Simplera, are being widely adopted. As of 2021, 38.4 million people in the U.S., or 11.6% of the population, have diabetes, according to the Centers for Disease Control and Prevention.
Valued but Undervalued
The market appears to be discounting Medtronic's long-term growth prospects, particularly its neuroscience and diabetes franchises. Medtronic's stock's price-to-earnings (P/E) ratio has fallen over the last year.
Currently, the shares trade at a P/E of 25, down from about 28 a year ago. Over the last 10 years, the shares have a median P/E multiple of 30. Medtronic's stock also trades at a better valuation than the S&P 500, which has a P/E of 30. This suggests that the stock deserves a lower valuation, but patient investors who believe its neuroscience products will continue to grow faster and those willing to wait for the diabetes business to become a major growth driver could see outsized gains.
[1] Global Neurovascular Devices market to reach USD 7.30 billion by 2032; Allied Market Research, 2022[2] Medtronic Wins Multiple FDA Approvals and CE Marks; Yahoo! Finance, 2022[3] Medtronic Stock Valuation: Cheap or Expensive?; The Motley Fool, 2022
- Despite Medtronic's underperformance in the recent stock market, its long-term financial prospects, particularly in its neuroscience and diabetes franchises, look promising, with the company's stock trading at a lower valuation than its historical median and the S&P 500.
- To invest in Medtronic's growth potential, one may consider a diversified portfolio strategy, with an emphasis on healthcare and medical devices sectors, as the company continues to make strides in its neuroscience and diabetes divisions.
- The market's valuation of Medtronic's stock could pose an attractive opportunity for investors, as its financial health shows potential in areas like diabetes technology, given the increasing prevalence of diabetes worldwide, as indicated by the Centers for Disease Control and Prevention.
- A prudent investment approach might involve looking beyond Medtronic's recent financial performance and focusing on the company's long-term prospects, such as its development and adoption of innovative neurostimulation devices and advancements in diabetes treatment technologies.
