Investing.com -- RBC Capital Markets has upgraded Medtronic PLC (ETR:2M6) (NYSE:MDT) to an "outperform" rating, reflecting increased confidence in the company's fundamentals and future growth potential.
This decision comes after a thorough review of Medtronic’s recent performance, including an in-depth meeting with CEO Geoff Martha.
The analysts now see a clearer path forward for Medtronic, particularly in areas like revenue growth, margin expansion, and new product developments.
Medtronic, which was previously rated at "sector perform," is now projected to see its stock price rise to $105, offering a 19% upside from its current value of $88.35.
As per RBC, Medtronic is currently trading at a steep discount relative to the S&P 500, with its price-to-earnings ratio at 6x compared to its historical average of 1x.
The analysts believe this undervaluation is no longer justified given the company’s improving financial performance and expected earnings per share growth.
Several factors have driven RBC’s decision to upgrade Medtronic. Firstly, its core business areas—such as cardiac rhythm management, spine, and surgical divisions—are expected to deliver mid-single-digit growth, buoyed by increasing healthcare utilization.
Secondly, Medtronic's growth areas, including diabetes, electrophysiology, and surgical robotics, are seen as well-positioned for upside, with numerous new products and innovations in the pipeline.
Moreover, Medtronic is on track to improve its profitability, with the company focusing on expanding its margins.
RBC notes that Medtronic has the potential to increase its operating margins by up to 500 basis points over the coming years, returning to pre-pandemic levels.
This focus on profitability, alongside a strong free cash flow conversion rate of over 80%, positions the company to deliver consistent returns to shareholders through dividends and stock buybacks.
The RBC analysts also emphasize the underappreciated potential of Medtronic’s products in cardiac ablation, renal denervation, and diabetes management.
For example, the PulseSelect device in cardiac ablation is performing better than expected, and the company's Sphere-9 catheter, set for FDA approval by the end of the year, has garnered positive feedback.
Additionally, the Symplicity Spyral Renal Denervation System for treating hypertension presents a multibillion-dollar opportunity, with favorable reimbursement developments expected.
Given the combination of growth prospects, margin expansion, and undervaluation, RBC analysts now view Medtronic as a compelling investment.