Medtronic Displays Glimmers of Progress in Third Quarter

Wide-moat Medtronic’s MDT fiscal third-quarter results offered marked sequential improvement over anemic second-quarter performance. With the firm on track to meet our full-year expectations, we’re leaving our fair value estimate unchanged. Organic third-quarter revenue grew 4% year over year, fueled by strength in cardiac rhythm and heart failure, neuromodulation, and structural heart. Though Medtronic has been affected by factors outside its control—like shortages of chips and resins, hospital staffing challenges, and China’s volume-based procurement program—some of these elements have eased and allowed some green shoots to emerge. We surmise the pockets of strength in the more elective product categories reflect some normalization of nonpandemic healthcare utilization. Nonetheless, we remain cautious about whether this quarter’s mid-single-digit growth can be maintained. We think this will depend on further commercialization of new products as well as the planned divestitures of some slower-growing, mature businesses.

Overall, we think Medtronic’s product portfolio is moving in the right direction. Although Medtronic has yet to launch its 780g pump in the U.S. due to tangles with the Food and Drug Administration, robust adoption of the pump outside the U.S. suggests it will also eventually reach commercial success in the U.S. Quarterly pump revenue growth outside the U.S. hit 18% year over year. Perhaps even more impressive was the 34% growth seen in continuous glucose monitors—a product and technology that has historically taken a backseat to insulin pumps at Medtronic. While the FDA’s schedule for reinspection is outside of Medtronic’s control, we give the firm credit for what it can do, which includes submitting its next-gen Simplera sensor for European and U.S. approval. We expect these improvements to the sensor, coupled with integration with the 780g pump, will make the two devices a strong competitor to the combination of a Tandem pump and Dexcom CGM.