What happened
Medtronic (MDT 2.48%) stock slumped 11.3% in November after the company and some of its closest peers published uninspiring earnings reports. Clearly, there are some industrywide challenges that are weighing on prices across the board.
MDT Total Return Level data by YCharts
So what
Medtronic reported earnings on Nov. 23, but it followed other medical device stocks downward after their companies reported earnings at the end of October. Stryker (SYK 2.98%) fell short of analyst estimates for both sales and earnings, and it revised its full-year forecasts downward. Boston Scientific (BSX 4.67%) fell slightly short of Wall Street's sales expectations, though it delivered profits in line with the analysts' models. Medtronic followed those by falling short of sales forecasts, and it echoed many of the talking points of its peers.
Image source: Getty Images.
Some common themes emerged among the medical device stocks. It's a competitive industry with significant pricing pressure, but there are also forces driving costs higher. Global supply chain issues and labor shortages are causing procedure cancellations, leading to higher costs for procedures that do take place.
Sales of devices that are used in the treatment of COVID-19 are falling off, negatively impacting sales growth in countries that are enjoying lower coronavirus case loads than in previous quarters. On the flip side, a resurgence of coronavirus cases in other countries is leading to restrictions on elective and non-emergency procedures, dealing blows to sales volumes for medical device stocks. Medtronic and its peers find themselves in an awkward limbo that's creating a challenging operating environment.
Things are uncertain right now, and it will probably take a few quarters for conditions to normalize.
Now what
Medtronic is never going to be a high-growth stock. Sales have been mostly flat over the past five years, and earnings have not moved consistently higher. With forward P/E and enterprise-value-to-EBITDA both around 20, the stock isn't particularly cheap or expensive.
Medtronic is more suitable as an income investment. It's a Dividend Aristocrat that's raised its dividend 44 straight years. That dividend has been increasing around 8% annually in recent years, and it's currently paying a 2.15% dividend yield. That's pretty good for S&P 500 companies in today's market. The 70% payout ratio suggests that Medtronic's dividend is sustainable, but it doesn't leave much room for growth. Overall, it's probably a safe bet that the leaders in the medical device market will enjoy stable demand over the long term, but don't be shocked if there's more volatility in the first half of 2022.
