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Is Medtronic Stock a Buy?

By Prosper Junior Bakiny – Updated Jun 2, 2020 at 5:24PM

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It depends on whether the medical device company can recover from its recent slump.

Medtronic's (MDT -1.61%) most recently reported quarter, the fourth quarter of its fiscal year 2019, failed to impress investors. Revenue of $6 billion decreased by 26% year over year and came in below the $7.02 billion analysts were expecting. Furthermore, adjusted earnings per share were $0.58, down 62% year over year and well below the $1.06 in adjusted EPS that analysts had anticipated.

In addition to its dismal performance during the fourth quarter, Medtronic shares have performed worse than the broader market. Year to date, the stock is down by 13.1%, while the S&P 500 is only down by 5.8%. Despite these less-than-flattering metrics, there are several good reasons to consider buying shares of the medical devices company; here are three. 

Device for robotic-assisted surgery.

A surgical robot. Image source: Getty Images.

1. The current situation is temporary

Medtronic's poor performance during its fourth quarter was due to the COVID-19 pandemic, and many of its medical-device peers have suffered the same fate, including Intuitive Surgical (ISRG -1.36%). This is hardly surprising: Healthcare systems around the globe have been focusing on helping COVID-19 patients, and many elective surgeries have been postponed.

Medtronic has incurred serious losses as a result. The company said that its revenue declined significantly across the many geographical regions where it conducts business. In the U.S., where Medtronic typically generates a little over half its revenue, weekly revenue declined by about 60% year over year starting in mid-March. 

Not all of Medtronic's segments performed poorly during the quarter. The company's respiratory, gastrointestinal, and renal business did well. Its revenue of $766 million was an increase of 6% year over year, due to increased demand for respiratory and patient monitoring products as a result of the COVID-19 pandemic. Still, all remaining segments posted year-over-year revenue declines in the quarter.

It is never good for a company to post poor financial results. But if ever there were a good excuse for doing so, a once-in-a-lifetime crisis would be it. Once the pandemic eases, I expect Medtronic to pick up where it left off. It is still one of the largest medical-device companies in the world, with a presence in over 150 countries, a robust lineup of products, and a strong pipeline that can deliver growing revenue and earnings year after year.

In particular, I think the diabetes division shows strong potential. Medtronic sells several products through this segment, arguably the most notable being its MiniMed 670G insulin pump. According to Medtronic, the MiniMed 670G is "the first insulin pump system that constantly self-adjusts to help keep glucose levels in target range, automatically."

Last year, the company claimed a whopping 62% share of the global market for insulin pumps. And although it faces increased competition in the U.S. from companies like Tandem Diabetes Care (TNDM -4.41%) and its t:slim X2 insulin pump, the MiniMed still has a lot of room to grow in international markets, where it dominates. And as the digital diabetes market continues to grow at a rapid clip over the next few years, Medtronic will undoubtedly be one of the big winners. 

In short, though the near term remains hazy, the company will recover in the long run. 

2. A strong financial position

Medtronic's fundamentals remain strong, and the company has the financial resources to handle the ongoing crisis. At the end of its fiscal year 2019, the company had $10.9 billion in cash and short-term investments, $1.1 billion in free cash flow, and a debt-to-assets ratio at a healthy 27.34%. The company said that it has no public debt maturing until March 2021.

This strong financial position will allow the company to navigate the current uncertain economic landscape, despite the severe impact it has had on its operations

3. A dividend you can take to the bank

Medtronic has raised its annual dividend for 43 consecutive years, which makes the medical devices giant a Dividend Aristocrat. Even as many companies are slashing or suspending their payouts amid the pandemic, the healthcare company recently raised its dividend again. Medtronic's dividend yield is a bit conservative at 2.2% compared to the 2.1% dividend yield of the S&P 500. But its 60.4% payout ratio and its 48.1% cash payout ratio show that Medtronic can sustain its dividend, and even reward its shareholders by way of additional dividend increases. 

Investor takeaway

It will likely be a wild and volatile ride in the near term for Medtronic, but as social distancing begins to ease, and as the economy starts reopening, the company should slowly but surely get back to business. Now is a good time to buy shares of this healthcare giant, considering its leading position in its industry and its strong financials, not to mention the fact that its shares have been thrown into the discount bin by the ongoing crisis. 

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Medtronic plc Stock Quote
Medtronic plc
$81.33 (-1.61%) $-1.33
Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
$187.93 (-1.36%) $-2.59
Tandem Diabetes Care Stock Quote
Tandem Diabetes Care
$45.33 (-4.41%) $-2.09

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