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Weakness in Medtronic Stock Is Creating a Major Opportunity

Larry Ramer

The novel coronavirus crisis is creating a tremendous need for ventilators. And Medtronic (NYSE:MDT) is one company that makes those coveted devices. Further, the company’s sales for its cardiac and vascular unit, which houses its ventilator business, should climb meaningfully during the crisis. This sales spike should boost Medtronic stock.

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The company’s ventilators cost between $5,000 and $50,000 each. Given the high price of Medtronic’s ventilators, there’s an excellent chance that the company’s profit margin on them is high. And I wasn’t able to find any evidence that Medtronic had agreed to lower or cap the price of its ventilators. However, Medtronic did share the design plan for its ventilators.

Consequently, during the crisis, the higher demand for ventilators should help the company’s bottom line.

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Further, Medtronic’s customer base consists of hospitals and doctors. And hospitals are open for business during the coronavirus crisis. Moreover, the nation’s hospitals will receive a cumulative $100 billion from the federal government, so they will have plenty of money to buy Medtronic’s products.

Don’t Fret About Declining Elective Surgeries

As many analysts have noted, medical practices will cancel or postpone some of their patients’ elective surgeries. This will lower demand for a portion of Medtronic’s products. But a decline in elective surgeries will not make a significant dent in Medtronic’s overall demand.

For example, its cardiac and vascular unit historically generates nearly 38% of its revenue. Many of the surgeries that fall under this unit are not elective. Moreover, the coronavirus affects the heart and lungs.

And diabetes, which accounts for nearly 8% of the company’s revenue, can also be life-threatening. The biggest wildcard is the company’s restorative therapies unit, “which includes devices and implants for spine, musculoskeletal, brain and nerve conditions” and generates 27% of Medtronic’s revenue.

Medtronic’s minimally invasive therapies unit, which generates nearly 28% of its revenue, is another mixed bag. That’s because the group’s products are used for both elective procedures, such as gastrointestinal surgeries, and non-elective ones, such as lung health procedures. However, since the minimally invasive therapies group sells products that are used for lung health and respiratory procedures, as well as patient monitoring, its revenue is unlikely to drop meaningfully during the crisis.

Also important to note is that many parts of the country have not yet been seriously impacted by the coronavirus. For example, as of April 2, Nebraska had 246 cases, Montana 227 cases and West Virginia had 217 cases.

Why does this matter? In some states that are seeing less of an impact, elective surgeries are carrying on as normal.


The Bottom Line on Medtronic Stock

Given all of these points, I expect increases in the revenue of the company’s cardiac and vascular group to offset and possibly slightly exceed the revenue losses of its other units. As a result, I expect the entire company’s revenue in the first and second quarters to be anywhere from 10% below to 10% above its normal levels.

Moreover, after the crisis is over, I expect it to benefit from a huge surge in elective surgeries and continued high demand for its ventilators as governments and hospitals around the world look to stockpile them for next fall.

Yet, in the last three months, MDT stock has tumbled more than 20%. Its forward price-earnings ratio is now about average for the stock market. As a result, investors should buy shares now.

As of this writing, Larry Ramer owned shares of Medtronic stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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