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Medtronic (MDT) Sees Business Recovery Despite Volume Pressure

The increase in the adoption of Medtronic plc's MDT globally-accepted advanced therapies is encouraging. Yet, headwinds like unfavorable currency movement and global economic uncertainties continue to affect Medtronic. The stock currently carries a Zacks Rank #3 (Hold).

Over the past year, Medtronic has outperformed the industry. As per the last share price movement, the stock has gained 21% compared with the industry’s 4.9% rise.

Medtronic’s first-quarter fiscal 2022 earnings and revenues both were ahead of the respective Zacks Consensus Estimate. Barring Diabetes, each and every operating segment and geography registered strong year-over-year growth on an organic basis.

The company's fiscal first-quarter results echoed a strong recovery of elective procedures with most of Medtronic’s businesses finishing at or above pre-COVID levels. This reflected solid execution and continued procedure volume recovery. The quarter’s gross and operating margins showed stupendous improvement on a year-over-year basis. The increase in the lower-end of Medtronic’s fiscal-2022 EPS guidance buoys optimism.

While the Delta variant is adversely impacting procedure volumes in certain geographies, Medtronic expects these effects to be manageable. According to the company, healthcare systems are better prepared as vaccination rates continue to increase. Several of its businesses are winning market share, banking on innovation and increased competitiveness. In calendar Q2, Medtronic gained share in its three largest businesses, cardiac rhythm management, surgical innovations and in spine.

In Pain Stim, despite a gradual slowdown in permanent implants and trialing procedures in the latter part of calendar Q2 due to the Delta variant, the company continued to win share and witnessed strong momentum in Intellis with DTM technology. With the launch of the Vanta recharge-free system, the portfolio is complete, highly competitive, and well positioned.

In terms of product launch, Medtronic launched over 190 products in the United States, Western Europe, Japan, and China in the last 12 months.

On the flip side, in the fiscal first quarter, Medtronic observed the emergence of the Delta variant of COVID-19 having a strong impact on procedure volumes in certain geographies. In Pain Stim, the company noted a gradual slowdown in permanent implants and trialing procedures in the latter part of the first quarter due to the spread of the Delta variant. In cardiovascular, Medtronic continued to lose share in the cardiac diagnostics business. It also lost share in neurovascular. Within the in-diabetes arm, the company is currently losing share in the United States.

Amid the pandemic, Medtronic’s business has been affected by three main factors. The first is the mix of urgent procedures versus those that are more deferrable. Almost all Medtronic’s businesses have been affected by the decline in procedure volumes. Medtronic’s businesses that had a larger mix of products using urgent procedures saw an impact. However, the company noted that in the first quarter, procedural volume has started to rebound.
 
The second factor that hampered growth is the loss of large bulk purchases due to depressed demand related to the pandemic. The third factor is related to capital equipment. While capital equipment represents a small amount of Medtronic’s overall revenues, there are certain businesses that have a higher mix and felt the impact of hospitals and surgery centers delaying their capital evaluation and purchases.

Key Picks

A few better-ranked stocks from the broader medical space include West Pharmaceutical Services, Inc. WST, AMN Healthcare Services Inc AMN and Alcon Inc. ALC, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s  Zacks #1 Rank (Strong Buy) stocks here.

West Pharmaceutical has a long-term earnings growth rate of 27.3%.

AMN Healthcare has a long-term earnings growth rate of 10.5%.

Alcon has a long-term earnings growth rate of 17.7%.


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