Medtronic plc (NYSE: MDT). While Medtronic is seeing near-term revenue and earnings headwinds from COVID-19 and the related slowdown in elective procedures, we believe that the company has strong growth opportunities from both current and soon-to-be-launched products. The company has a solid market position in its Minimally Invasive Therapies, Brain Therapies and Pain Therapies units as well as in its overseas Diabetes Group, and is well placed to benefit from the post-pandemic recovery. We expect more robust earnings growth in fiscal 2022.
Medtronic faced severe headwinds for revenue growth in the fiscal 1Q21 (ended July) as the impact of the COVID-19 global pandemic shut down surgical suites in May and reduced the volume of elective procedures for most of the quarter. While elective procedures resumed with volumes stepping up sequentially in June and July, the pace of the recovery is uncertain as COVID-19 case numbers rise in certain parts of the U.S. and in Europe. Concerns about a ‘second-wave’ of cases as Northern Hemisphere temperatures fall may lead to partial reimposition of social distancing mandates. With uncertainty over the near-term business outlook, Medtronic is not providing quarterly or annual financial guidance.
The company reported 1Q21 results on August 25. Adjusted EPS came to $0.62, down 51% from a year ago. GAAP net income was $487 million or $0.36 per share, compared to $864 million or $0.64 per share a year ago. Worldwide revenue was $6.507 billion (-13% reported; -17% organic). This benefit was estimated at $360-$390 million in revenue. Organic growth also excludes the Titan Spine acquisition.
Procedural volumes slowed dramatically as social distancing mandates associated with the COVID-19 pandemic closed physician offices and shutdown hospital surgical suites to all but the most urgent procedures. Such procedural volumes for elective surgeries are key factors in sales of medical devices sold by Medtronic. The company saw the most severe impact to sales level in May and saw improvements in June and July.
The impact from COVID-19 varied across geographic regions. In 1Q21, U.S. revenue was $3.351 billion (-14% reported; down in low 20s organic). Overseas revenue in developed markets was $2.175 billion (8% reported; down low-double digits organic). Emerging Markets revenue was $981 million (-18% reported; down high-teens organic).
The reduced sales volume hit the profit margins.
EARNINGS & GROWTH ANALYSIS
We are maintaining our estimates for adjusted EPS of $4.05 for fiscal 2021 and $5.60 for fiscal 2022.
With operational headquarters in Minnesota, Medtronic is one of the world’s largest medical technology and solutions companies. Its devices focus on cardiac rhythm management, spinal and surgical navigation technologies, treatments for diabetes and neurological conditions, vascular therapies, and cardiac surgery. MDT is a component of the S&P 500.
This relatively high multiple reflects the company’s depressed earnings prospects in fiscal 2021 due to COVID-19. However, we believe that Medtronic has solid growth opportunities from both current and soon-to-be-launched products, and look for stronger earnings growth in FY22. Our price target is $115.