Needham published a report that pointed to previous comments from Medtronic plc's (NYSE: MDT) management that indicate the potential for changes in the coming year, with a spinoff of a large business considered an option.
In its Q2 earnings call in November 2021, the company said the executive committee was spending "a lot more time" looking at portfolios and capital allocation.
The Needham analysts said there might be smaller businesses or product lines in Medtronic's sights for exiting, but Diabetes and Spine businesses are the most likely candidates for a spinoff.
The analysis of these businesses' potential spinoffs concludes that neither would unlock immediate shareholder value since the sum of parts of the RemainCo and SpinCo would be slightly below the current value of MDT, the analysts wrote.
However, they added that a spinoff might still eventually create value over time by allowing SpinCo to be more focused.
The analysts concluded that diabetes looks the most likely for the spinoff of the two.
If MDT were to spin off the Diabetes business, Needham analysis shows it causing a ~10 bps headwind to revenue growth in FY24-FY26 and be ~6% dilutive to FY24-FY26 adjusted EPS.
"MDT turned around its spine business, which has now had several years of at- or above-market growth. But since management isn't only considering underperforming assets, we still see potential for a spine spin-off. Given MDT's limited exposure to orthopedics outside of spine, we believe management might choose to spin off the spine business (including enabling technologies)", noted the analysts.
In the case of Spine business spinoff, analysis shows it causing a ~20 bps tailwind to revenue growth in FY24-FY26 and being ~11% dilutive to FY24-FY26 adjusted EPS.
Needham has a Buy rating with a price target of 4.00 on the shares.
Price Action: MDT shares closed 0.55% higher at $112.33 on Thursday.
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