You can break the stock market into different components, such as investing styles. These are growth and value stocks.
Growth stocks have recently attracted investor interest. The Russell 3000 Growth Index returned 39.8% over the last year through Jan. 6. That was more than 24 percentage points better than the Russell 3000 Value Index.
By comparison, Medtronic's (MDT 0.04%) share price dropped 5.6% during this time. Including dividends, returns over the last 12 months were still a negative 2.4%.
However, while this performance has been disappointing, I'm optimistic about Medtronic's long-term prospects.
Image source: Getty Images.
Still growing
Medtronic started about 75 years ago and launched the first battery-operated pacemaker a few years later. It currently generates more than $30 billion in annual sales.
That's an impressive history, but what about the future? Revenue has been increasing, and the top line grew across all four of its businesses (cardiovascular, neuroscience, medical surgical, and diabetes) in the latest quarter.
Fiscal second-quarter adjusted revenue rose 5% to $8.3 billion. This excludes foreign-currency exchange translation effects and other revenue. The results were for the period ended on Oct. 25, 2024.
Medtronic's adjusted earnings per share grew 8%. While top-line and bottom-line growth hasn't been impressive, there's reason for optimism that this could grow faster.
Neuroscience leads the way
A range of specialist physicians, such as spinal surgeons, neurologists, and orthopedic surgeons, uses Medtronic's neuroscience products. With $4.8 billion in first-half revenue, the business accounted for 29% of the company's top line.
The division's revenue growth has accelerated recently. Adjusted second-quarter revenue increased 6.7% to $2.3 billion.
This was driven by the adoption of spinal implants, and neuromodulation products (spinal cord stimulation. brain modulation that treats things like Parkinson's symptoms, and implantable drug infusions for chronic pain). Medtronic has several products, such as AiBLE (spinal implants) and Percept (brain modulation), that have been getting adopted
Small but growing
Its diabetes segment, while the smallest business (about 8% of quarterly revenue), has been growing the fastest. In the latest quarter, adjusted revenue grew 11% to $686 million. Growth prospects remain bright. As type 1 and type 2 diabetes continue inflicting people, Medtronic's solutions such as MiniMed (insulin pump), InPen (real-time continuous glucose monitoring and insulin dosage information), and Simplera (approved last August) continue to get adopted.
Going forward, the division seems likely to account for a larger share of revenue. As of 2021, 38.4 million people in the U.S., or 11.6% of the population, have diabetes, according to the Centers for Disease Control and Prevention.
With a company Medtronic's size, it's hard to move the needle. However, over time, this business could become a major revenue and profit driver.
Discounted valuation
The market appears to be discounting Medtronic's long-term growth prospects, particularly its neuroscience and diabetes franchises. The stock's price-to-earnings (P/E) ratio has fallen over the last year.
The shares currently trade at a P/E of 25, down from about 28 a year ago. Over the last 10 years, the shares have a median P/E multiple of 30.
Medtronic's stock also trades at a better valuation than the S&P 500, which has a P/E of 30. That's an appropriate benchmark since it includes large-cap equities.
The market believes the stock deserves a lower valuation. But patient investors who believe its neuroscience products will continue to grow faster, and those willing to wait for the diabetes business to become a major growth driver could see outsized gains.
