If you had invested in a stock 10 years ago, you would expect to be sitting on some decent gains by now. The S&P 500 averages a long-term return of 10% per year. That means that over a decade of compounding those gains, your investment in the average stock should be up 159%.
But not every investment turns out to be a winner, of course. And the recent COVID pandemic did disrupt many businesses. Consider top medical device maker Medtronic (MDT 0.62%). It should have achieved strong growth over the past decade as more Baby Boomers retired, leading to an uptick in the need for healthcare.
So has Medtronic made for a strong investment over the past 10 years? Here's a closer look at what your investment would look like if you'd bought $10,000 worth of its shares in October 2013.
The stock traded at $53 on Oct 1, 2013
A decade ago, Medtronic's stock was worth $53, and investing $10,000 into it would have given you a little less than 189 shares of the healthcare company. The stock would chug along, earning strong gains over the years, but COVID did unfortunately disrupt things. Not only did the pandemic impact the company's supply chain, but it weighed down one of its largest international markets, China. Today, with the stock trading at around $80 per share, Medtronic hasn't doubled in value. It has only risen by 51% from where it was 10 years ago. That $10,000 investment would be worth approximately $15,100.
But that deserves an asterisk. That's because at the end of 2019 and before the huge market sell-off that began due to the pandemic, shares of Medtronic were worth more than $113. The stock technically did double from its value on Oct. 1, 2013 but it would ultimately give back much of those gains in just the past few years. It's a disappointing performance for a stock whose business was on a positive trajectory.
Can its business bounce back?
What's encouraging about the business is that while the pandemic did weigh on Medtronic's results, the company's growth rate appears to be back to around pre-pandemic levels:
MDT Revenue (Quarterly YoY Growth) data by YCharts
Plus, the population is still aging, there's not going to be a need for less healthcare and medical devices in the future. As a result, the company remains well-positioned to benefit from those ongoing trends. A year ago, the company reported obtaining 200 approvals for new technologies in the past 12 months.
It has also been working on improving logistics. Medtronic has consolidated supply chains and manufacturing organizations. It has also standardized planning. And it's working on finding cost-savings opportunities to offset the impact of inflation. Collectively, these moves can improve efficiency and profitability for Medtronic in the long run. Although it has struggled in recent years, the business remains profitable and in good shape moving forward.
Is the stock at a reasonable valuation?
Another potential reason the stock might rally is that its valuation is relatively low. Trading at 16 times its estimated future earnings, that's lower than the healthcare average of 18. It's also trading at a relatively modest two times its book value. And its price-to-earnings-to-growth ratio, or PEG, of 1.6 also implies that analysts are projecting good growth from the business in the long run; the lower the ratio is, the better bang for the buck growth investors may be getting from an investment.
The consensus analyst price target of nearly $92 also suggests decent upside of around 15% for the stock. But price targets change often, and are only set for where analysts think the price will go in the near future (typically over the next 12 months). In the long run, there is the potential for greater returns for Medtronic investors.
Should you buy shares of Medtronic?
With a favorable valuation, plenty of growth potential still out there, and an above-average dividend yield of 3.4%, Medtronic is a stock that looks like a good buy right now. Even if you have to wait for other investors to recognize the value here and buy up the stock, the dividend can help compensate you for your patience.
Medtronic hasn't been a bad buy for the past decade, and if not for COVID, its ascent may have continued and it would be looking like a rockstar right now, with some impressive gains. But the positive takeaway is that its recent decline gives investors an opportunity for a do-over to buy this promising healthcare stock at a lower valuation.
