Buy Medtronic for the long term, this investor says

Large-cap medical technology company Medtronic (Medtronic Stock Quote, Chart, News NYSE:MDT) has had a heck of a year, with the stock racing upwards in response to consistent quarterly beats.

But even with all those gains there’s likely still upside to be had, says fund manager Gordon Reid, who thinks the stock could be a long-term hold.

“We don’t own it but it is a good company, no question about it,” said Reid, president and CEO of Goodreid Investment Counsel, speaking to BNN Bloomberg on Thursday. “They’re in the medical device business and their biggest products are pacemakers.”

“They trade at about 19x earnings, they have high predictability of earnings and good stability of stock price. If you look at a peer group analysis they trade pretty attractively,” he says.

Medtronic, which was founded in Minneapolis but moved its headquarters to Ireland through a corporate tax inversion in 2014, has been a steady climber of a stock over the past decade, with 2019 standing as no exception. Year-to-date, MDT is up 19 per cent, while its dividend yield is currently at two per cent.

The company has posted strong numbers in recent quarters, with its fiscal first quarter delivered in late August beating expectations for both revenue and earnings. The company reported higher revenue for each of its four segments — Cardiac and Vascular, Minimally Invasive Therapies, Restorative Therapies and Diabetes — and overall revenue of $7.493 billion, a 1.5-per-cent year-over-year increase. (All figures in US dollars.)

“Medtronic had a solid first quarter, delivering revenue growth, operating margin expansion, and adjusted EPS growth all ahead of expectations,” said Omar Ishrak, Medtronic chairman and CEO in a press release. “It’s a good start to our fiscal year.”

The $7.493-billion in revenue beat analysts’ average estimate of $7.396 billion, while MDT’s earnings of $1.26 per share was also better than the consensus $1.18 per share.

Reid says that while investing shouldn’t be a ‘buy and forget about it’ endeavour, investors looking for a longer-term hold could do well by Medtronic.

“I never look at things and say where is this going to be in three or five years. We look at things every day and you have a new set of eyes every day because there’s always new information about companies. Ideally, we want to hold companies for the long term, and that usually means that things have gone well,” says Reid.

“I’d say that with Medtronic, in particular, given the multiple and given the predictability, unless we see something quite dramatic happen with that market, say, government intervention or pricing intervention, I think that you should look at a ten-per-cent or greater return on this stock over time,” he says.

Earlier this year, Medtronic CEO Omar Ishrak claimed his company now has the strongest pipeline that he’s ever seen, a sentiment echoed by JP Morgan analysts who currently rate MDT as “Overweight,” saying, “As we move through FY20 and into FY21, we think investors will want to own Medtronic not only for the expected top-line acceleration, from ~4 per cent this FY to ~5 per cent in FY21, but also for the potential upside in the out-years as we believe many of these pipeline catalysts aren’t appropriately modelled by the Street.”