Medtronic plc (MDT) and Edwards Lifesciences Corporation (EW) are two prominent players in the medical devices manufacturing industry. Ireland-based MDT develops therapeutic and diagnostic medical products and technology and sells them to hospitals, physicians, clinicians, and patients worldwide. It operates through Cardiovascular; Neuroscience; Medical Surgical; and Diabetes segments. EW provides products and technologies for structural heart disease and critical care, as well as surgical monitoring worldwide. It manufactures heart valve systems and repair products used to replace or repair a patient’s diseased or defective heart valve.
Increased focus on elective surgeries due to a significant decline in occupancy of hospitals for the treatment of COVID-19 and rising need from an aging population make the medical devices industry’s prospects bright. Integration of new technologies for enhanced precision and accuracy, deployment of robotic assistance in operating rooms, and other breakthroughs should drive the industry’s growth.
Investors’ interest in this space is evident from the SPDR S&P Health Care Equipment ETF’s (XHE) 1.7% gains over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) 1.4% loss. The global medical devices market is expected to grow at a 5.4% CAGR to reach $657.98 billion by 2028. So, both MDT and EW should benefit.
MDT is a winner with 5.8% gains year-to-date versus EW’s 7.5% loss. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On March 9, 2022, MDT entered into a contract with Vizient, Inc., the nation’s largest healthcare performance improvement company, to add Touch Surgery Enterprise, the first AI-powered surgical video management and analytics platform for the operating room (OR), to Vizient’s offerings. Touch Surgery Enterprise offers a fully integrated hardware and software system connected to the cloud, simplifies the process of recording, analyzing, and sharing surgical video, and works easily with many laparoscopic and robotic scopes, enabling hospitals to digitize their OR while leveraging existing equipment. This should witness high demand in the coming months.
On March 31, 2022, the U.S. Food and Drug Administration (FDA) approved EW’s MITRIS RESILIA valve, a tissue valve replacement specifically designed for the heart's mitral position. This therapy is the company's latest innovation offering advanced RESILIA tissue with an anti-calcification technology that allows devices to be stored under dry packaging conditions, facilitating ease of use. This approval should enable the company to witness a surge in demand from surgeons and patients.
Recent Financial Results
MDT’s net sales for its fiscal 2022 third quarter ended January 28, 2022, decreased marginally from the prior-year period to $7.76 billion. The company’s non-GAAP operating profit came in at $2.18 billion, indicating a 5.5% rise from the year-ago period. Its non-GAAP net income increased 5.3% year-over-year to $1.85 billion. MDT’s non-GAAP EPS came in at $1.37, indicating a 6.2% year-over-year improvement. The company had $3.48 billion in cash and cash equivalents as of January 28, 2022.
For its fiscal 2021 fourth quarter ended December 31, 2021, EW’s net sales increased 11.6% year-over-year to $1.33 billion. The company’s adjusted gross profit came in at $1.02 billion, up 13.9% from the year-ago period. Its adjusted operating income came in at $365 million, representing a marginal rise from the prior-year period. While its adjusted net income increased 1.3% year-over-year to $320.30 million, its adjusted EPS grew 2% to $0.51. As of December 31, 2021, the company had $862.80 million in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, MDT’s revenue and total assets have increased at CAGRs of 1.3% and 1.1%, respectively. MDT’s EPS is expected to increase 27.5% year-over-year in fiscal 2022, ending April 30, 2022, and 3% in fiscal 2023. Its revenue is expected to grow 6.4% in fiscal 2022 and 3.9% in fiscal 2023. Analysts expect the company’s EPS to grow at a 12.2% rate per annum over the next five years.
EW’s revenue and total assets have increased at CAGRs of 12% and 16.9%, respectively, over the past three years. Analysts expect EW’s EPS to grow 14.9% year-over-year in fiscal 2022, ending December 31, 2022, and 13.7% in fiscal 2023. Its revenue is expected to grow 10.2% year-over-year in fiscal 2022 and 12.1% in fiscal 2023. Analysts expect the company’s EPS to grow at a 14.7% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, EW is currently trading at 3.20x, 63.3% higher than MDT’s 1.96x. In terms of forward EV/Sales, MDT’s 4.95x compares with EW’s 12.64x.
Profitability
MDT’s trailing-12-month revenue is almost 6.1 times EW’s. However, EW is more profitable, with a 32.9% EBITDA margin versus MDT’s 30.2%.
Furthermore, EW’s ROE, ROA and ROTC of 28.9%, 12.6% and 16.8% compare with MDT’s 9.5%, 4.6% and 5.4%, respectively.
POWR Ratings
While MDT has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, EW has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
In terms of Stability, MDT has been graded a B, which is in sync with its lower volatility compared to the broader market. MDT has a 0.75 beta. EW’s C grade for Stability is consistent with its higher volatility. EW has a 1.15 beta.
MDT has a C grade for Value, reflecting its slightly higher-than-industry valuation ratios. MDT’s 4.95x forward EV/Sales is 26.6% higher than the 3.91x industry average. EW’s D grade for Value reflects its overvaluation. EW has a 12.64x forward EV/Sales, 223.5% higher than the industry average of 3.91x.
Of the 158 stocks in the Medical - Devices & Equipment industry, MDT is ranked #18, while EW is ranked #37.
Beyond what we have stated above, our POWR Ratings system has also graded MDT and EW for Sentiment, Quality, Momentum, and Growth. Get all MDT ratings here. Also, click here to see the additional POWR Ratings for EW.
The Winner
Integration of the advanced technologies in medical devices and rising demand from the aging population should benefit both MDT and EW. However, a relatively lower valuation makes MDT a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Medical - Devices & Equipment industry.
MDT shares . Year-to-date, MDT has gained 3.84%, versus a -12.12% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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