Medtronic (NYSE:MDT) sells medical devices to hospitals and medical centers. In a normal year, that would be a catalyst for MDT stock. But 2020 has been anything but a normal year as it relates to health care. And that leaves investors with an interesting decision on the company’s stock.
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It’s apparent that the United States is not getting the “V-shaped” recovery that many analysts thought might be possible. And that affects hospitals that are still seeing softer revenue from elective medical procedures.
But it’s also unlikely that this weakness will last. Procedures are still down significantly on a year-over-year basis. But, barring a nationwide surge in Covid-19 cases, it feels safe to say that the recovery is in good shape.
And analysts are conceding that Medtronic’s balance sheet looks the best it has in years. These are two reasons why the stock should start to make its way back to the record high set in February. But investors may still have to wait a couple of quarters.
A Pandemic Winner and Loser
The novel coronavirus created increased demand for the company’s ventilators. The company’s ventilators sell for between $5,000 and $50,000 and carry a hefty margin. In fact, chief executive officer Geoff Martha said the company had a fivefold increase in ventilator production and a nearly doubling of revenue.
But as we know, Medtronic was not going to be able to keep up with the massive need for ventilators. So, the company did the honorable thing and offered its ventilator specs to other companies free of charge. This allowed companies as wide ranging as Whirlpool (NYSE:WHR), General Motors (NYSE:GM) and Ford (NYSE:F) to become ventilator manufacturers.
Despite that, ventilator production was a big reason Medtronic posted $6 billion in revenue in its 2020 fourth quarter. This was only slightly lower than analysts’ expectations. But more importantly, it illustrates the company’s ability to generate revenue in any market.
That was important, because Medtronic saw a decline in demand for other medical devices in the quarter. And although the company is pointing towards sequential growth in 2021, they acknowledged they are projecting continued softness in the next two quarters.
The Balance Sheet Is Solid
As I mentioned above, Medtronic’s balance sheet is better than it has been in years. The company generated $6 billion in free cash flow (FCF) for the fiscal year. And liquidity is not an issue. At the end of the company’s fiscal year, the company had $10.9 billion in cash or cash equivalents. And they still had access to $3.5 billion from their credit facility. This is all without any public debt maturing until March of next year.
Plus, unlike many companies that suspended or cut their dividends, Medtronic raised its dividend. The company increased it by 4 cents per share in May. This made it 24 consecutive years of dividend increases. The company’s annual dividend is now $2.32 per share.
More Devices Are on the Way
One concern for investors was if Medtronic’s pipeline would be affected by regulatory delays. That does not appear to be the case. On the company’s conference call, executives said they expected numerous approvals this quarter.
Buy MDT Stock for Value Now and Growth Later
Investors may not see significant growth in MDT stock for the remainder of 2020. However, it’s important to note that even sitting about 20% lower than its all-time high in February, the stock is still at five-year highs.
Analysts have set a $114.66 12-month price target for MDT stock. With demand for elective procedures likely to increase in 2021, investors should expect to see revenue and earnings heading back to 2019 levels. And that should be good news for investors that stick with the stock through the next two quarters.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
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