Key Takeaways:
· Quarterly sales decline 25% as April included in the quarter
· US has a 33% decline in April sales while China -21%, improving from its -46% in February/March
· Margins impacted as company continues to invest, contrary to other medtech firms
· Cash position is robust, dividend increased
Current Price: $97 Price Target: $121
Position Size: 2.91% TTM Performance: +3.5%
Medtronic released their 4Q FY20 results last week. Organic revenue was down 25% as the pandemic diverted healthcare resources away from elective procedures and bulk purchases. The decline in revenue impacted earnings as well, with non-GAAP EPS down ~63%. Margins have been compressed from COVID related expenses, and mix shift towards lower margin products and an increase in China tariffs, but also because it is not lowering salary expenses.
Since Medtronic’s fiscal year doesn’t follow the typical calendar year, their latest quarter includes April, which corresponds to the beginning of the pandemic in the US (48% of sales) and Europe (vs. other medtech names that ends their quarter in March, thus only 2 weeks of the crisis). This gives us some insight into the impact of the virus on sales in developed countries in April (Q2 for most companies) : in April the US showed a 33% decline, Western Europe 32%, and China 21% – China was an improvement from the -46% in Feb and March. A reminder that emerging markets represents 15% of total sales.
In terms of capital allocation, Medtronic will continue to focus on smaller deals (~$1B in size), which should limit the need to issue additional debt. Its cash position is strong (~$11B in cash), no near term debt maturity due and access to $3.5B credit facility.
Regarding expectations for next quarter, it should be slightly worse than Q4 as they will have a full quarter impact of procedures deferrals. The company is not cutting back on investments, hoping to be on the offense. The management team is not providing a detailed FY21 guidance at this point, only that it is expecting a recovery beginning in the second quarter of its fiscal year. We think that Medtronic’s diversified products (especially Respiratory and patient monitoring, as well as life support) should help the company weather the crisis. Near term, unlike others, the company chose to not cut back on its sales team salary as it wants to gain share once the COVID-19 crisis eases (which explains the great deleverage on the EPS line).
Today we see the decline in sales priced in the stock, and the cash position makes us comfortable that Medtronic remains a low-risk, with room for some M&A.
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
Category: Equity Earnings
Tag: MDT
$MDT.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
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Suite 500
Boston, MA 02109