News and Research for Dividend Select Portfolio Holdings
Medtronic Posts Disappointing Fiscal Second Quarter; Lowering Our Fair Value Estimate
by Debbie S. Wang | Morningstar Research Services LLC | 11-22-22
Medtronic delivered disappointing fiscal second-quarter results, and we're lowering our fair value estimate to $112 per share, down from $122, after adjusting our full-year and fiscal 2024 estimates downward. In the second quarter, the firm faced challenges that have dragged down growth, some of which were specific to the firm and others that have affected the entire industry. In the former bucket, Medtronic struggled with supply shortages in surgical innovations, delayed U.S. regulatory approval of the 780g insulin pump, and battery replacement headwinds in neuromodulation. In the latter bucket, unfavorable foreign exchange rate changes, higher input costs, hospital staffing issues that have pulled down procedure volume, and China's volume-based procurement, or VBP, program have also put pressure on Medtronic. Considering these issues are unlikely to resolve themselves within the next few quarters, we've pulled back our projections for fiscal 2023-24. Despite these short-term hurdles, we think Medtronic's wide economic moat remains intact, as its intangible assets and switching costs have not weakened, in our view.
The quarterly growth of 2.5% in constant currency was fueled by structural heart and specialty therapies. Most other divisions posted low-single-digit growth in constant currency, which presented incremental progress from first quarter but falls short of the medical technology market growth around 5%. Management has had two years, albeit under pandemic conditions, to put the pieces in place for a return to market growth at Medtronic. As COVID-19 recedes, we're looking for signs of some businesses to bounce back over the ensuing quarters. However, we recognize that management's emphasis on generating innovation often takes longer to bear fruit. Considering we've seen it take rivals about three years to rev up and commercialize a new product cycle, we're watching for signs of success in fiscal 2024.
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