Medtronic rattled by Covid resurgence

The healthcare sector offers safety and stability because the companies tend to perform well in all economic conditions.

They provide things we need in good times and bad which makes them recession-resistant, though not recession-proof.

Medical technology has had a good year as hospitals have resumed more normal schedules, but a recent selloff has centred around uncertainty about the Omicron variant.

Here are two updates.

iShares U.S. Medical Devices ETF (NYSE: IHI)  Closed Dec. 7 at $63.81 (All currency figures in US dollars.)

Background: This ETF was launched in 2006 and holds US manufacturers who make and distribute medical devices. It has US $8.2 billion in assets.

Portfolio: The ETF holds 66 stocks with the top five accounting for 50% of the fund.  They are Thermo Fisher Scientific (14.2%), Abbott Labs (13.1%), Danaher Corp (11%), Medtronic (7.6%) and Intuitive Surgical (4.6%).

Performance: The ETF has a total 1-year return is 16.9%.  The strong performance of the top holdings explains the gains.

Thermo Fisher and Abbott Labs are both having record years, in part because they are benefitting from the testing boom associated with the pandemic. Abbott Lab’s earnings rose 69% in its latest quarter with Covid-testing sales at $1.9 billion for the quarter. Of course, this business did not exist 2 years ago.

 Key metrics: The ETF has a management fee of 0.43% and modest trailing 12-month dividend yield of 0.32%. It also has a very high p/e ratio of 47.3, which means high growth expectations are built into the price. Any distributions would be subject to U.S. withholding tax.

 Medtronic Inc. (NYSE: MDT) Closed Dec. 7 at $112.27  (All figures in US dollars.)

Background: Medtronic is the world’s largest medical device company with a market capitalization of $170 billion. About 60% of its sales and profits come from outside the US. 

Medtronic operates in four segments. Cardiovascular management devices, including pacemakers are the largest at 40% of sales. Wound closure products and imaging devices are another 28%. Robots, implants, and surgical tools are 26%. The remaining 7% is from the diabetes group which makes insulin pumps and other consumables.

Performance: Medtronic’s shares hit a high in late September and have sold off since. The shares are down 4.2% year-to-date and 0.30% in the latest 12 months.

 Recent developments:  Medtronic’s second quarter revenue of $7.8 billion was 2% higher on an organic basis but missed the consensus forecast of about $8 billion. Profit of $1.31 billion, or $0.97 per share was 260% higher, than the $490 million or $0.36 per share last year.

CEO Geoff Martha said sales were hurt by a resurgence of Covid-19 in some US markets and staffing shortages at doctors offices, hospitals and clinics. Both reduced the volume of medical procedures where Medtronic’s products are used.

Medtronic reduced its revenue guidance for the year and CFO Karen Parkhill said in a conference call she expects the pandemic to continue to affect their business in the second half of the year. Since then the arrival of Omicron virus has created more Covid-related uncertainty.

 Dividend: Medtronic raised its dividend 7.4% to $0.63 per quarter with the May, its 43rd consecutive year of increase. The annual total is $2.52 for a yield of 1.9% at current prices.

Outlook: In the short term, the pandemic will slow Medtronic’s sales as procedures are delayed and hospitals target capital spending toward covid-related equipment. However, the company stands to benefit from long term trends including aging in developed economies which is increasing demand for its products.

This is an edited version of article that appeared in the Internet Wealth Builder on Dec. 6, 2021.  For information on how to reprint this article please view this page.