Medtronic (MDT 0.62%) is a medical device giant that has generated billions of dollars in earnings over time thanks to its diabetes, cardiovascular, neuroscience, and medical-surgical platforms. The company's growth stagnated in recent years, though, so management set out on a path to transform the business -- with a focus on efficiency and investing in high-growth areas.
However, the medical device leader's share price hasn't yet begun to reflect the company's positive moves. In fact, the stock hasn't done much this year, rising about 1.2%. Considering all this, is Medtronic a buy today, or would it be better to avoid the stock and seek out other opportunities? Motley Fool contributors Adria Cimino and Keith Speights offer their bull and bear cases.
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A bullish view on Medtronic
Adria Cimino: Though Medtronic stock hasn't yet taken off, there's reason to believe that could happen down the road -- and lead to lasting gains. That's because the company has been successfully managing its transformation and making moves that should lead to long-term growth.
For example, Medtronic is investing in high-growth areas such as artificial intelligence (AI) and robotics -- and seeing results. In its fiscal 2024 second quarter, which ended Oct. 27, the company's GI Genius platform, which is powered by AI, helped Medtronic's endoscopy business to grow by 13%.
The company also is moving closer to bringing its Hugo robotic system to U.S. operating rooms. U.S. regulators recently approved the start of a pivotal trial for Hugo in hernia surgery. More than 1 million hernia repairs are done in the U.S. annually, so this could be a significant market for Medtronic.
Management says that considering the revamp of the business, it expects to consistently deliver mid-single-digit percentage revenue growth -- and it has managed to do this for the past four quarters. The company reported that level of growth or better across its businesses in the most recent quarter, and posted strong growth across geographies, too.
So, Medtronic is on the right track when it comes to earnings. At the same time, when you invest in this medical device giant, you'll also benefit from its dividend policy. The company aims to return at least 50% of free cash flow to shareholders every year, and has put a focus on dividends.
Today, Medtronic trades at a lower price-to-forward-earnings ratio than it did a couple of years ago. At the same time, growth prospects look stronger. So, right now there's reason to be bullish on Medtronic shares.
MDT PE Ratio (Forward) data by YCharts.
The bear case against Medtronic
Keith Speights: Honestly, I can't make a scary, growling, fierce bear case against Medtronic. All in all, it's a decent company and stock. However, I can make a sleepy, drooling, flabby bear case against Medtronic.
Let's start with growth. Medtronic delivered year-over-year revenue growth of 5.3% in its latest fiscal quarter. That's perhaps slightly more exciting than watching paint dry.
What about the company's earnings more than doubling year over year? This might sound fantastic. It's important to note, though, that this seemingly impressive growth was in GAAP (generally accepted accounting principles) earnings. On a non-GAAP basis (which Wall Street watches more closely), Medtronic's earnings declined 3%. Not so fantastic.
One could reasonably argue that Medtronic is more of a stock for income investors than growth investors. As a result, the company's dividend should be viewed as more important than its growth. I agree. And I think that Medtronic's dividend yield of nearly 3.5% at the current share price is attractive. So is the medical device giant's 46-year streak of dividend increases. On the other hand, there are other stocks that offer even higher dividend yields with even more impressive records of dividend hikes. (AbbVie immediately jumps to mind.)
I'll also acknowledge that Medtronic's forward price-to-earnings multiple of 15.5 is a lot better than many stocks these days. Again, though, you won't have to look hard to find stocks with great dividends that are even more attractively valued.
The bottom line is that Medtronic is a decent stock in a market where you can buy alternatives that are a lot better than just decent. That might not constitute a scary, growling, fierce bear case against Medtronic, but it's nonetheless a valid reason for investors to look elsewhere.
Should you favor the bullish or the bearish view?
As the bear argument points out, other companies beat Medtronic when it comes to dividends and earnings growth. So Medtronic doesn't look like an absolute must-buy stock. Still, this medical device giant has the products and market position to deliver steady earnings growth over time -- and that could lead to steady share price gains, too.
Whether or not you should buy Medtronic will depend on your investment strategy. Aggressive investors will likely find better opportunities elsewhere. But cautious investors with diversified portfolios may readily scoop up shares of this medical device player for the stability of its businesses and its commitment to dividend growth.
