Should you buy this top notch stock?

WHello the S&P 500 has jumped 27% year-to-date amid economic recovery, shares of major medical device stock Medtronic (NYSE: MDT) fell 13% over the same period. With Medtronic shares below 5% of its 52 week low, this begs the following questions: Is Medtronic now a buy? Or should investors sit on the sidelines?

Let’s take a look at the potential reasons for Medtronic’s underperformance, its operational fundamentals, and its valuation to answer these questions.

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Industry uncertainty and increased regulatory oversight

There are two potential reasons for the poor performance of Medtronic stocks lately. First of all, it is important to remember how Medtronic generates its revenue and profits. The company sells medical devices worldwide that treat a variety of chronic health conditions, including gastrointestinal illnesses, heart disease and diabetes.

But since the advent of COVID-19, many hospitals have become busy treating COVID-19 patients, delaying elective procedures in which Medtronic devices are used. This has been a headwind on Medtronic’s financial results at various points throughout the pandemic. And with the rapid spread of the omicron variant, hospitals could once again have to postpone elective procedures, which could be another blow to Medtronic in the near future.

Second, Medtronic recently received a warning letter from the United States Food and Drug Administration (FDA) earlier this month regarding quality issues at its diabetes business headquarters in Northridge, California. While it is likely that Medtronic will work diligently with the FDA to resolve concerns about its MiniMed and Paradigm insulin pumps, this event has exacerbated the decline in action in recent exchanges.

Medtronic sails admirably in difficult conditions

While Medtronic’s second quarter 2022 earnings report was mixed (its fiscal year ends in April 2022), the company is doing well given it has faced headwinds from COVID-19. Medtronic reported second quarter revenue of $ 7.85 billion, representing a 2.6% growth rate from the same period a year earlier. This is slightly lower than analysts’ expectations of $ 7.98 billion in revenue for the quarter. What was the reason for Medtronic’s lack of revenue?

Paraphrasing CEO Geoffrey Martha’s opening remarks during Medtronic’s recent earnings call, the strength of international markets was more than enough to offset headwinds in the U.S. market caused by the Delta variant and staff shortages in the health system. Medtronic’s international revenue grew 7.2% year-over-year in the second quarter, while its US revenue declined 1.4%. The company’s strong performance in international markets resulted in a decline in revenue of just 2% from the prior quarter, which Martha rated as “slightly better than most of our large-cap medtech competitors.” .

Profitability helped Medtronic improve its operating margin by 470 basis points, which propelled its non-GAAP earnings per share (EPS) 29.4% year-on-year to $ 1.32 in the second quarter. Medtronic’s non-GAAP EPS is slightly higher than analysts’ forecast of $ 1.29.

The company has a culture of innovation

Even with the pandemic hanging over Medtronic, the company has managed to launch more than 180 products in the United States, Western Europe, China and Japan in the past 12 months. That says a lot about the cutting-edge culture that Medtronic has fostered. And this innovation doesn’t seem to be stopping anytime soon. That’s because Medtronic remains committed to spending more than $ 2.7 billion on research and development this fiscal year, which would represent an increase of more than 10% from last year.

Medtronic’s ability to launch such large quantities of breakthrough medical devices is why analysts predict the stock will generate 11% annual profit growth over the next five years.

A Dividend Aristocrat to Buy with Confidence

Despite the adversity the medical device industry has faced over the past two years, Medtronic’s fundamentals appear to be sound. But is the valuation attractive enough to justify buying the share?

At its current price of $ 104, Medtronic is trading at a futures price-to-earnings (P / E) ratio of just 18.3. This is significantly lower than the medical device industry’s average-to-average profit ratio of 29.3. Given that Medtronic’s projected five-year profit growth rate is only moderately below the industry average of 15%, it can be argued that there is room for a significant increase at the current valuation. . In fact, analyst consensus also seems to point to a sizeable rise, with a 52-week price target of $ 135 per share.

As a component of the S&P 500 that has increased its dividend for 44 consecutive years, Medtronic is a dividend aristocrat. With a dividend payout ratio set at 44.1% for this fiscal year, investors can collect Medtronic’s safe and above-market return of 2.5% while waiting for the market to assign a higher valuation multiple to the. action.

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Kody Kester is the owner of Medtronic. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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