Medtronic’s stock is a better choice than this pharmaceuticals Bellwether


We believe Medtronic Stock (NYSE: MDT) is currently a better choice than Johnson & Johnson Stocks (NYSE: JNJ), given its better outlook. Although Medtronic
trades at a comparatively lower valuation of 3.5x rolling earnings versus 4.5x for J&J, this discrepancy in valuation is largely justified given J&J’s superior profitability and lower financial risk, as shown below.

If we look at stock returns, JNJ, with a 3% drop this year, has done better than a 20% decline for MDT stocks and returns of -23% for the broader S&P 500 Index. JNJ’s outperformance can in part be attributed to its recently announced $5 billion share buyback plan, reaffirming its outlook for full-year earnings of $10.70 in the middle of its range. There’s more to the comparison, and in the sections below we explain why we believe MDT stocks will outperform JNJ stocks over the next three years. We compare a host of factors such as historical revenue growth, returns and valuation multiple in an interactive dashboard analysis Medtronic vs. Johnson & Johnson

: Which stock is a better bet? Parts of the analysis are summarized below.

1. J&J revenue growth is better

  • J&J’s revenue growth of 7.2% over the last twelve months is much better than -1.7% for Medtronic.
  • Although we are looking at a longer period, J&J’s sales growth has been better. It grew at an CAGR of 4.9% to $93.8 billion in 2021 from $81.6 billion in 2018, while Medtronic saw revenue grow at a annual average of just 1.3% to $31.7 billion in fiscal year 2022 (Medtronic’s fiscal year ends April), compared to $30.0 billion in 2018.
  • While J&J’s medical device business faced headwinds in 2020 due to the impact of the pandemic, it rebounded in 2021.
  • The pharmaceutical segment recorded a 14% increase in sales in 2021, and the sales of the medical device segment increased by 18%. The strong performance of both segments should continue.
  • The company’s pharmaceuticals business is experiencing strong growth driven by market share gains for its cancer drugs, Imbruvica and Darzalex, and immunology drugs, Stelara and Tremfya.
  • Medtronic’s sales have also been affected during the pandemic due to the postponement of elective surgeries. The rise of new variants of Covid-19, including Delta and Omicron, has impacted the recovery in demand.
  • There are high hopes for Medtronic’s most advanced insulin pump system – MiniMed 780G – to drive its diabetes sales in the future. The product has not yet been approved in the United States. The stock MDT underperformance mentioned earlier in this article may be related to concerns about the delayed approval of the MiniMed 780G. Late last year, the US FDA issued a warning to Medtronic’s diabetes business center in California, citing deficiencies in quality system requirements.
  • Our Medtronic revenue and Johnson & Johnson revenue dashboards provide more information about business sales.
  • Going forward, J&J’s revenue is expected to grow faster than Medtronic’s over the next three years. The table below summarizes our revenue forecasts for both companies over the next three years. It shows a CAGR of 1.6% for Medtronic, compared to a CAGR of 3.6% for J&J, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for businesses that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenue. For businesses negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery at the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies with positive revenue growth during Covid, we consider the average annual growth before Covid with some growth weight during Covid and the last twelve months.

2. J&J is more profitable and carries less risk

  • J&J’s operating margin of 23.9% in the latest twelve-month period is slightly higher than Medtronic’s 19.9%.
  • This compares to the figures of 24.5% and 25.2% seen in 2019, before the pandemic, respectively.
  • J&J’s free cash flow margin of 24.7% is also better than Medtronic’s 23.0%.
  • Our Medtronic operating profit and Johnson & Johnson operating profit dashboards have more detail.
  • When it comes to financial risk, J&J fares better. Its 15.5% debt as a percentage of equity is lower than 21.2% for Medtronic, while its 13.3% cash as a percentage of assets is higher than 9.9% for the latter, implying that J&J has a better debt position and more cash cushion.

3. Filet of Everything

  • We see that J&J has demonstrated better revenue growth, is more profitable, has a better debt position and has a larger cash cushion. On the other hand, Medtronic is available at a comparatively lower valuation.
  • Based on historical performance, J&J appears to be a clear winner out of the two. But will it continue to outperform in the years to come? We do not think so.
  • As for the outlook, using the P/S as a basis, due to the large swings in the P/E and P/EBIT, we believe Medtronic is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Medtronic and J&J over the next three years and indicates an expected return of 14% for Medtronic over this period versus an expected return of 8% for J&J, over the next three years. basis of Trefis Machine Learning analysis – Medtronic vs. Johnson & Johnson – which also provides more detail on how we arrive at these numbers.

Although the MDT stock seems like a better choice than the JNJ stock, it is useful to see how Medtronic peers price on the measures that matter. You will find other useful comparisons for companies in all sectors on Peer comparisons.

In addition, the Covid-19 crisis has created many price discontinuities, which can offer interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to UnitedHealth Group v Pool Corporation.

Considering rising inflation and the Fed’s hike in interest rates, among other factors, MDT stock has fallen 20% this year. Can it fall more from here? See how far can Medtronic’s stock go comparing its decline to previous stock market crashes. here is a summary of the performance of all stocks during previous stock market crashes.

What if you were looking for a more balanced portfolio instead? Our quality portfolio and multi-strategy portfolio have consistently beaten the market since late 2016.

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