Investment Alert: 31.9% Upside In Healthcare Stock

Ivy Investment Alert: Buy Medtronic Under $80/share

Disclaimer: Ivy Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.

Famously, Warren Buffett once said he looked out on the road and mused “if only I could set up a toll to capture a nickel from each car, I’d be rich.” In the medical world, Medtronic is that equivalent toll booth. As night follows day, patients will need surgeries. And when they do, Medtronic benefits. It captures revenues each time a patient requires surgery using its medical devices.

Medtronic manufactures a wide range of medical devices and therapies to treat chronic diseases and conditions. It has four business divisions under its umbrella, including:

1. Cardiac and Vascular: This segment includes products and therapies for the treatment of cardiovascular diseases, including implantable pacemakers, defibrillators, heart valves, and stents.
2. Minimally Invasive Therapies: This division encompasses treatment of gastrointestinal and lung diseases, as well as spinal disorders.
3. Restorative Therapies: Addresses chronic pain, neurological disorders, and spinal conditions, deep brain stimulators, and drug infusion pumps.
4. Diabetes: Targets diabetes, including insulin pumps, continuous glucose monitoring systems, and related accessories.

The company operates in more than 150 countries worldwide and has grown revenues in all but one year over the past decade. So, why do we think the stock is a buy?

Key Points

1. Medtronic is a leading medical technology company that manufactures a wide range of devices and therapies to treat chronic diseases and conditions. It has four business divisions: Cardiac and Vascular, Minimally Invasive Therapies, Restorative Therapies, and Diabetes.
2. The company has  a global distribution network, and a robust research and development capability that positions it to benefit from rising demand for medical devices as the global population ages.
3. Medtronic is financially stable, generating revenue from multiple geographies and business divisions, with a fortress balance sheet and consistent cash flows. A careful financial analysis reveals a compelling upside, with a projected 31.9% increase in share price to $106 per share.

Investment Thesis

Medtronic has a strong competitive position due to its extensive product portfolio, research and development capabilities, and global distribution network. As the global population ages, demand for medical devices will rise and Medtronic is well-positioned to benefit from this trend; its products address a wide range of chronic diseases, including diabetes, heart disease, and neurological disorders.

The company is financially in a great place. It generates revenues from a broad set of business divisions across multiple geographies, providing a level of revenue stability and diversification. It’s also got a fortress balance sheet and generates consistent cash flows, which allows it to finance R&D, acquire other companies, and pay dividends.

Medtronic is also renowned as a pioneer in medtech. It innovates new products in a vast numbers of ways, for example by partnering with surgeons on new implants, who in turn can earn royalties on patents when devices are commercialized. The company’s reach within the hospital is extensive, touching a vast number of stakeholders. This creates a moat that’s hard to disrupt.

Valuation

When we ran the numbers on Medtronic, it became ever more clear the further we dug how well the company has grown its business over the past decade.

Revenues are up from $16.5 billion to $31.6 billion. Over the same period, operating income has risen from $4.4 billion to $6.0 billion. The reason for the slower growth in operating income is largely due to heavy spend on SG&A where the company almost doubled costs over the past decade, whereas R&D is up by “just” 50%.

After running the numbers, the upside is compelling. We see 31.9% upside to $106 per share. That’s a little more aggressive than the consensus analysts figure, which sits at $92 per share.