Should You Buy, Sell or Hold Medtronic Before Q1 Earnings?

Medtronic plc MDT is scheduled to report first-quarter fiscal 2025 results on Aug 20, before the opening bell.

In the last reported quarter, the company's adjusted earnings of $1.46 exceeded the Zacks Consensus Estimate by 0.69%. Medtronic beat estimates in each of the trailing four quarters, the average surprise being 4.48%.

The Zacks Consensus Estimate for fiscal first-quarter revenues is pegged at $7.90 billion, suggesting growth of 2.5% year over year. The consensus estimate for first-quarter earnings is pegged at $1.20 per share, indicating no change on a year-over-year basis.

Estimate Trend

Earnings estimates for Medtronic have remained unchanged at $1.20 per share for the fiscal first quarter over the past 60 days.

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Let's look at how things have shaped up for Medtronic before the announcement.

Mixed Trend Ahead of Q1 Earnings

Since the past several quarters, Medtronic's earnings growth has been held back by headwinds like cost escalation and currency impacts. Although inflation stabilized a bit during the fiscal fourth quarter, it is still higher than the historical trend. The continued rise in raw material and labor costs, as well as oil price volatility, has been denting the company's profit. Further, a rising interest rate leading to increasing borrowing costs is concerning. In the fourth quarter of fiscal 2024, gross margin contracted 56 basis points to 64.6% on a 2.1% rise in the cost of revenues. Further, selling, general and administrative expenses rose 5.7% year over year. Adjusted operating margin contracted 251 bps year over year to 24.5%.

Like its peers, the impact of the present geopolitical situation, including sanctions and other measures being imposed in response to the Russia-Ukraine conflict, may have impacted fiscal first-quarter profits.

Added to this, unfavorable currency movements have been a major dampener over the last few quarters, as in the case of other important MedTech players too. Medtronic expects its fiscal 2025 first-quarter revenues to reflect an unfavorable impact of $85 million to $135 million from currency translation.

Despite these challenges, Medtronic has consistently showcased the resilience of its underlying business fundamentals, delivering mid-single-digit organic revenue growth for several quarters in a row. While its recent product launches are driving growth across multiple businesses, a swift pace of several compelling product approvals promises consistent growth in the years to come.

Particularly, the company's AFib, Structural Heart, robotics, neuromodulation, hypertension and diabetes businesses are expected to have registered growth in the to-be-reported quarter, banking on several new product launches. Among the company's Established Market Leaders, the company might have witnessed growth through the Cranial & Spinal Technologies segment on the increasing adoption of AiBLE, Medtronic's spine technology ecosystem. Further, Mazor Robotics, StealthStation navigation, O-arm Imaging and Midas Rex powered surgical instruments are expected to have witnessed growth.

In Cardiac Pacing Therapies, the Micra leadless pacemaker franchise is expected to have recorded strong growth driven by the adoption of its latest generation, Micra AV2 and VR2. In Defibrillation Solutions, the Aurora EV-ICD's adoption is expected to have remained strong in the fiscal first quarter. Within Surgical, the company is expected to have seen strong growth within Advanced Energy product lines.

The Zacks Consensus Estimate for MDT's overall Cardiovascular business revenues in the first quarter of fiscal 2025 indicates a 2.6% year-over-year improvement.

Among the company's Synergistic businesses, Medtronic is expected to report strong growth within Cardiac Surgery, ENT and Endoscopy segments. Pelvic Health, Coronary, Peripheral Vascular and Neuromodulation too are expected to have registered growth in the first quarter.

Among Medtronic's Highest Growth Markets businesses, the company is likely to have gained traction within the Cardiac Ablation Solutions arm, driven by the strong sales of Pulse Field ablation products, which are more than offsetting declines in the cryo product line.

Medtronic's Diabetes unit recorded strong growth in the United States in the fiscal fourth quarter, with the global adoption of the MiniMed 780G system driving performance. This trend is also likely to have continued in the fiscal first quarter.

The Zacks Consensus Estimate for MDT's Diabetes arm revenues indicates an improvement of 6.1% year over year in the first quarter of fiscal 2025.

What Does Our Model Say?

Our proven model does not conclusively predict an earnings beat for Medtronic this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. However, that's not the case here.

MDT has an Earnings ESP of 0.00% and carries a Zacks Rank of 4 (Sell) currently.

Bigger Picture

In recent years, the company has made some foundational changes to the organization, including streamlining the operating model, improving global operations, supply chain and quality, and bringing in expertise from outside the industry. It is actively allocating capital to fast-growth MedTech markets and fueling innovative technologies in areas like robotics, AI and closed-loop systems that ensure its growth over the next decade.

Medtronic's revenues have improved and become more durable from implementing a performance-driven culture and changing incentives underlying the new product approvals in major markets. With top priority placed on restoring the company's earnings power, these actions are expected to eventually result in better-leveraged earnings growth through margin stabilization and improvement. 

Medtronic's highest growth opportunities, comprising 20% of its revenues, are in markets that are large and growing faster than the overall company. For example, in Cardiac Ablation, it has significantly invested in the Electrophysiology arm to expand its share in the attractive $8 billion-plus market.

Further, in Diabetes, Medtronic's MiniMed 780G system recently gained a CE Mark for use with the Simplera Sync sensor and received FDA approval in August 2024. Within Structural Heart, the new Evolut FX system favorably positions the company in the $6 billion-plus TAVR (transcatheter aortic valve replacement) market. In March 2024, the Evolut FX+ TAVR system gained the FDA's approval for the treatment of symptomatic severe aortic stenosis.

Shares Underperform Industry and S&P

In the fiscal first quarter, Medtronic stock lost 0.1% in contrast to the industry's 1.1% growth and the S&P 500's rise of 8.2%.

Q1 Price Comparison

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Cheap Valuation

If we look at the value components, MDT has a Value Score of B at present.

This is evident from the Price/Earnings ratio. MDT shares currently trade at 15.27X forward earnings, well off its five-year high of 30.08X and below the median of 17.51X. The stock is also trading significantly below the industry's 20.84X.

The company is also trading at a significant discount to other industry players like Boston Scientific Corporation, with its current P/E being 30.18, and Abbott ABT, whose current P/E is 22.39X. This suggests that investors may be paying a lower price relative to the company's expected earnings growth.

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To Conclude

While Medtronic holds immense potential for long-term growth, given its momentum, ongoing comprehensive transformation, breakthrough innovations and exposure to strong secular growth markets, the company battles significant headwinds from macroeconomic issues and rising expenses, which can significantly dent its bottom-line growth. For now, it might be prudent for investors to avoid buying the stock and monitor MDT's upcoming results for a better entry point.

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