A Reversal Is Brewing For Medtronic: Buying The Dip

Key Points

• Medtronic had a solid quarter but gave weak guidance, which has shares moving lower. 
• The company and industry are rebounding from COVID so trends are favorable. 
• Cautious guidance sets up an opportunity in this high-yield dividend stock.

A reversal has been brewing for Medtronic NYSE: MDT and healthcare device makers all year. Increasing procedure volume, supply chain normalization, and innovation drive results and underpinning growth. Medtronic’s Q4 results testify to that combination and should have increased the stock price. The weight dragging the market down is the guidance which isn’t bad, just not as good as expected. The guidance was not as good as expected but may be considered cautious given the momentum in F2023.

Even so, the stock presents a high-yield value trading at current levels and is an attractive buy for that reason alone. The stock yields more than 3.0%, shares trading near the $85 level, and the payout is reliable. The company is a Dividend Aristocrat near Dividend King, paying only 50% of earnings, and has a solid balance sheet. The company announced a small dividend increase with the Q4 results, making the 47th consecutive increase. 

Sell-siders also support the stock, which is another reason to think the bottom is in. The institutions have been net-bullish for the last 12 months and have been buying solidly for the last 2 quarters. They own 80% of the company, and analysts Hold it too. The Marketbeat.com consensus rating is Hold, with a price target trending flat over the last quarter. The price target is about 8% above the current price action and may cap gains soon. The guidance reduction will not spark many price target increases, if any, but outperformance later this year will. 

Medtronic Has Solid Quarter, Gives Soft Guidance 

Medtronic had a solid quarter with revenue of $8.5 billion. This is up 5.6% YOY, beating the Marketbeat.com consensus by $0.250 billion or 300 basis points. The strength was driven by gains in Cardiovascular, up 12%, and Neurology, up 5%, offset by flat results in Medical and Diabetes. 

The margin news is mixed. The margin contracted slightly compared to last year but not enough to offset the top-line strength and less than expected. The Q4 GAAP EPS of $1.57 is up 3% compared to the 5.6% top-line gain but beat by $0.02. The news that moved the market lower is the guidance. The company expects FY revenue growth from 4% to 4.5% with EPS of $5.00 to $5.10, which is down compared to 2023 and below consensus. 

Among the potential catalysts for the stock is the release of the Minimed. The Minimed smart insulin pump delivers doses more frequently than current models and mimics natural body responses better. It will be released in June and could impact results as soon as the current quarter. The insulin pump market is worth $3.7 billion and growing at a mid-single-digit CAGR. Medtronic is already the leader in this arena and will further cement that role with the Minimed. 

Medtronic Is At The Bottom: Reversal Is In Play 

The price action in Medtronic stock moved lower following the release, but a reversal is still in play. The price action is forming a Double Bottom, with support already evident near the short-term moving average. Assuming the market follows through with this signal, shares of MDT should move sideways until mid-summer. The next earnings release is due in August and is the next likely catalyst for share prices.