Medtronic Stock Has Hit Been by Anti-Obesity Concerns. Why It Should Rebound.
Aug 15, 2024, 3:00 am EDT
There has been a lot of talk about how popular weight-loss drugs such as Novo Nordisk’s Ozempic and Wegovy and Eli Lilly’s Mounjaro and Zepbound are hurting big food stocks. But the injectable GLP-1 medications are also having an impact on other companies in the healthcare sector. Just look at Medtronic, the equipment giant that makes stents, pacemakers, and insulin pumps.
Shares of Medtronic, at a recent $81.74, are down slightly this year, even as the Health Care Select Sector SPDR exchange-traded fund is up more than 10%. Investors have expressed concerns that weight-loss drugs may reduce demand for some of Medtronic’s diabetes and cardiovascular products, as well as equipment the company makes for bariatric weight loss surgical procedures for obese patients.
But Medtronic has been adamant that the GLP-1 drugs won’t hurt it over the long haul. Chairman and CEO Geoff Martha said at a Goldman Sachs conference in June that there was “zero impact” from weight-loss drugs on its insulin delivery business. Martha did concede during an earnings call in February that there has been a “modest impact from declines in bariatric surgery,” but he added that this may be temporary and that over time, more people will “become eligible for surgery...as patients seek a more permanent treatment to weight loss” than using medications alone.
Investors are clearly nervous, though. Medtronic shares now trade for 15 times earnings estimates for the current fiscal year, a discount to their five-year average of 19.5. They are also trading at a lower valuation than most other large-cap medical equipment stocks, including GE HealthCare Technologies, Boston Scientific, Stryker, and Becton Dickinson.
But CL King analyst Kristen Stewart said in a report after Medtronic’s latest earnings came out in May that new products, such as the Food and Drug Administration-approved PulseSelect Pulsed Field Ablation System to treat atrial fibrillation and the proposed launch of its Hugo surgical robot, will lead to greater confidence in Medtronic’s future revenue growth. As such, she thinks the stock could trade at a price/earnings multiple closer to 18 and has a target price of $102, more than 25% above current levels.
Medtronic will report its fiscal-first-quarter results on Aug. 20. Analysts are forecasting that earnings will be flat compared with a year ago, but they expect revenue and earnings momentum to pick up as the year progresses. Wall Street is predicting top-line growth of 3% in fiscal 2025 and an earnings-per-share increase of about 5%. For the following year, analysts anticipate that sales will rise another 5% and that earnings will be up 7%. That’s steady and stable growth at a reasonable price. Investors can also count on a reliably growing dividend as well. Medtronic raised its payout to shareholders in May, the 47th straight annual increase. The stock now yields a healthy 3.4%.
There are other potential catalysts. The world’s aging population is a clear tailwind for Medtronic. Drugs like Wegovy aren’t going to eliminate the need for older people to have heart procedures and manage their blood sugar. Medtronic could also get a boost from using generative artificial intelligence to develop even more effective treatments and equipment. Medtronic already uses AI technology for a “smart” insulin pen that helps diabetics monitor glucose levels, for example.
The worries about a hit to sales of surgical equipment and devices for cardiovascular and diabetes patients appear to be overdone—and more than priced into Medtronic’s now slimmer stock at this point.
Write to Paul R. La Monica at paul.lamonica@barrons.com
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