Summary

On August 23, Medtronic will publish its FQ1’23 financial results. We assert that Medtronic, which has dropped more than 36% from its September highs, has most likely bottomed out at its July lows.

The company is also convinced that FY23’s comparisons would be significantly simpler because its supply chain condition is anticipated to get even better. The business is still committed to its recommendations.

We noticed that MDT’s valuations were moving back toward their 10-year mean. However, we assert that the downside in MDT from the current levels appears to be constrained.

We, therefore, repeat our Buy recommendation. Investors may think about increasing their positions in response to probable short-term downside volatility.

Thesis

On August 23, leading medical technology and device manufacturer Medtronic plc (NYSE:MDT) will release its highly anticipated FQ1’23 earnings. In a technical analysis article we published in July, we recommended that investors buy the market’s bottom quickly.

Since MDT appears to have bottomed out in the medium term in July, we are happy to report that the downside should be constrained from its lows in that month. Additionally, despite the fact that MDT has somewhat lagged the market in its current rebound, we are certain that it will be re-rated as the firm finishes up its prior fiscal year with extremely difficult comps.

Given the recent market volatility, MDT might possibly see short-term negative effects. Despite this, we advise investors to use any potential weakness as a chance to increase exposure to a very successful medical technology company.

Therefore, as we approach MDT’s earnings report, we retain our Buy rating on the company.

Although FY22 was difficult, investors must look forward.

From its September 2021 highs to its most recent July lows, MDT declined by more than 36%. Therefore, we assume that MDT has likely finished taking a beating in order to reduce the danger of its impending headwinds. Recall that the business in its FQ4’22 earnings report cited “acute” supply chain difficulties that were exacerbated by the COVID lockdowns in China.

Investors should keep in mind that China has subsequently eased some of its restrictions, despite the fact that the country’s economy is still having trouble growing at the desired GDP rate. However, we are certain that it will contribute to boosting the optimistic mood in MDT, which anticipates overcoming its most pressing short-term difficulties. CEO Geoff Martha stated at a conference in June recently:

Obviously, Q4 was affected. In other words, the persistent chip issue and resin shortage had significantly reduced our safety stock by the time Q4 rolled around. However, things became considerably more urgent in Q4, about halfway through, particularly for our Surgical Innovations company. A shutdown in China occurred in April and continued into May. As a result, the resin problem is getting better. The packing problem is improving, as we can see. We took that into account and realized that it would still take some time. Therefore, we can see that these issues will start to fade, especially towards the second half of our fiscal year.

As can be seen here, Medtronic’s important revenue sectors had a significant decline toward the conclusion of FY22. Additionally, the strong recovery in FY21 has prepared the company for H2’22 performance against even tougher comps. The less difficult comps through FY23, however, offer us cause to be optimistic that Medtronic’s commitment to its sales and EPS growth projection will encourage investors to support its fair value. Martha emphasized:

Comparisons get much simpler as we start observing the second quarter of the fiscal year FY23. 

We achieved 2.6% in Q2 of FY22, 1.6% in Q3, and 1.4% in Q4. Comparisons in the second part of FY23 is much simpler. We’re putting down a smaller foundation. Top line growth of at least 5% and EPS growth of at least 8% is expected. This is intended to achieve for FY23. Additionally, you have a dividend that is rising and in good condition; in fact, it just increased by 8% last quarter. (Medtronic’s revenue)

Medtronic’s Valuation is still fair.

As can be seen above, MDT’s valuations have risen from their lows in July toward the 10Y mean. Additionally, we noticed parallel decreases in its free cash flow (FCF) and NTM earnings multiples. Because of this, even though Medtronic might not be regarded as materially undervalued, we are sure that a medium-term re-rating is in the works if its operating performance increases with simpler comparisons.

Should I buy, sell, or hold MDT stock?

As we predicted, Medtronic bounced back from its low point in July. Its valuation is still fair, though, therefore we are convinced that even from these levels, the downside should be constrained.

Despite the details above we advise investors to maintain their accumulated holdings at present levels. Furthermore, when the market absorbs some of its recent gains from July, investors can leverage probable near-term downward volatility to build further positions.

Featured Image:  Megapixl @Wolterk

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