Key Takeaways:
Current Price: $111 Price Target: $115
Position Size: 3.35% TTM Performance: +23%
Medtronic released their 2Q FY20 results this morning, with organic revenue growth of +4.1%, a +20bps adjusted operating margin expansion and +7.4% adjusted EPS growth. During the call, the management team gave an early view on 2020, raising growth at three of their largest divisions. More disappointing was the Diabetes segment guidance of low single-digit growth representing a 500bps cut to sales growth (now 1-3%) as competitive pressure intensifies in the US. On the positive side, they are expecting their new pacemaker to be approved in 2021. The TAVR segment performed extremely well this quarter with 20% global growth and mid-20% US growth (check this video to understand what this is: https://mendedhearts.org/video/tavr-procedure-video/ ). Medtronic’s competitor Edwards Lifesciences recently released earnings that showed similar high growth, which we find reassuring regarding this market’s potential. MDT’s CEO is set to retire and Geoffrey Martha will take on the helm of the company in April 2020. The new CEO is looking to be more aggressive in small M&A and allocating capital to higher growth segments. Overall this was a good quarter but we see limited near-term upside in the stock, waiting for new products in the pipeline to lift sales up further. Medtronic is such a well-diversified company that overall growth can be somewhat toned-down in a sector that has done well in the last years.
Updated FY20 guidance:
Organic revenue growth +/- 4% (unchanged)
Operating margin ex-FX +40bps
EPS increased to $5.57-$5.63 from $5.54-$5.60
MDT Thesis:
· Stands to benefit from secular trends (1) increased utilization from Obamacare (2) developed populations age
· Strong balance sheet and cash flows. Increased access to non-cash should allow MDT to meaningfully increase their dividend
· 6% normalized Real Cash yield provides solid total return profile over next 2-3 years
· Ownership interest aligned. Management incentivized to maximize shareholder returns – 14% 10yr average ROIC
[tag MDT]
$MDT.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109