Should You Buy Medtronic Stock at $80?

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Medtronic stock (NYSE: MDT) is down 5% in a week while down 7% in a month, trailing the broader markets with the S&P 500 index up 6% in a month. The recent decline can be attributed to the Q2FY23 results the company reported yesterday, with revenue coming in lower and earnings higher than our estimates. After the recent decline, we find MDT stocks undervalued, as discussed below.

Medtronic revenue of $7.6 billion reflected a 3% yoy decline, slightly less than our estimate of $7.7 billion, primarily due to forex headwinds. The Neuroscience segment experienced low-single-digit sales growth, while all other segments saw a yoy decline. Company earnings of $1.30 per share and adjusted basis were down 2% year-over-year given lower revenue, approximately 140 basis points decrease in adjusted operating margin, partially offset by a slight decline in total number of outstanding shares.

Given the forex headwinds, the company lowered its full-year revenue growth forecast to between 3.5% and 4%, down from its previous expectation of 4% and 5%. It now expects earnings to be between $5.25 and $5.30 per share, compared to the previously forecast range of $5.53 and $5.65. We’ve updated our model to reflect the latest quarterly results. We forecast revenue of $31.5 billion and adjusted earnings of $5.32 per share. We estimate Medtronic’s appreciation approximately $106 per share, which is 36% higher than the current market price of $78. This represents a 20x P/E multiple based on expected earnings per share of $5.32 in fiscal 2023, in line with the average over the past three years.

But what about the near term?

With MDT stock down 7% in a month, will it continue its downward trajectory or is an upside just around the corner? Judging by historical performance, there is a greater likelihood of an increase in MDT inventory during the following month. MDT stocks have seen a move of -7% or more 179 times in the last decade. 114 of these resulted in an increase in MDT shares in the subsequent one-month period (twenty-one trading days). This historical pattern reflects 114 of 179, or a 64% chance of an increase in MDT shares in the coming month. See our analysis Medtronic Stock Likely to Rise for more details.

Calculation of ‘Event probability’ and ‘Probability of increase’ based on the data of the last ten years

  • After moving -6.6% or more for five days, the stock rose 55% of the time in the following five days.
  • After moving -2.8% or more for 10 days, stock rose 59% in the following 10 days
  • After moving by -7.1% or more over a twenty-one day period, the stock rose 64% of the time in the following twenty-one days.

This pattern suggests a higher probability of MDT shares rising over the next five, ten and twenty-one days.

Medtronic Return (recent) comparison with peers

  • Five-Day Return: JNJ Highest at 2.6%; MDT lowest at -6.6%
  • Ten-Day Return: ISRG Highest at 9.2%; MDT lowest at -2.8%
  • Twenty-one-day return: ISRG highest at 19.4%; MDT lowest at -7.1%

While MDT stock appears undervalued, the Covid-19 crisis and recent market volatility have led to many price discontinuities, which may present attractive trading opportunities. For example, you’d be surprised how counterintuitive the stock valuation is to Becton Dickinson vs. America.

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