Medtronic plc MDT is scheduled to report third-quarter fiscal 2025 results on Feb. 18, before the opening bell.

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In the last reported quarter, the company’s adjusted earnings of $1.26 exceeded the Zacks Consensus Estimate by 1.61%. Medtronic beat estimates in each of the trailing four quarters, the average surprise being 1.99%.

The Zacks Consensus Estimate for fiscal third-quarter revenues is pegged at $8.33 billion, suggesting growth of 2.9% year over year. The consensus estimate for third-quarter earnings is pegged at $1.36 per share, indicating a 4.6% rise on a year-over-year basis.

Q3 Estimates for MDT Move Slight South in 3 Months

Fiscal third-quarter earnings estimates for Medtronic have edged down 0.7% to $1.36 per share over the past 90 days.

Despite the company registering earnings beat over the trailing four quarters, estimates have been southbound, reflecting challenges due to rising costs and expenses as a result of inflationary and global geopolitical pressure through the months of the fiscal third quarter. Elevated raw material and labor costs are expected to have had a notable impact on the company's profitability during this period. Additionally, the insulin pump recall in October, notifying Medtronic MiniMed 600 series or 700 series insulin pump users of potential risks of shortened pump battery life, might have impacted third-quarter performance, adding to investors' concern.

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Let’s look at how things have shaped up for Medtronic before the announcement.

Factors to Focus on Ahead of MDT's Q3 Earnings

Since the past several quarters, Medtronic’s earnings growth has been held back by headwinds like cost escalation and currency impacts. In the second quarter of fiscal 2025, the company-adjusted gross margin was down 70 basis points due to the adverse impact of currency. Company-adjusted operating margin also declined 90 basis points year over year due to unfavorable currency translation apart from supply issues.

Although December data from the U.S. Bureau of Labor Statistics (BLS) indicates a slowdown in core inflation, the previous two months recorded relatively higher percentages. Additionally, a high-interest rate environment through the fiscal third quarter may have continued to make borrowing more challenging during this period.

Added to this, unfavorable currency movements are once again likely to have acted as a major dampener during the fiscal third quarter, as in the case of other important MedTech players too. Medtronic expects its fiscal 2025 third-quarter revenues to reflect an unfavorable impact of 1% from currency translation.

Further, the earlier-mentioned product recall within the Diabetes business too might have had a full-quarter impact on fiscal third-quarter Diabetes segment sales.

Despite these challenges, Medtronic has consistently showcased the resilience of its underlying business fundamentals, delivering mid-single-digit organic revenue growth for several quarters in a row. While its recent product launches have been driving growth across multiple businesses, the swift pace of several compelling product approvals promises consistent growth in the years to come.

Particularly, the company’s pulse field ablation, TAVR, neuromodulation, hypertension, robotics and diabetes businesses are expected to have registered growth in the to-be-reported quarter, banking on several new product launches. Within the company’s Established Market Leaders category, the company might have witnessed growth in the Cranial & Spinal Technologies segment on the increasing adoption of AiBLE ecosystem of differentiated spine implants. Further, Mazor Robotics, StealthStation navigation, O-arm Imaging and Midas Rex powered surgical instruments are expected to have witnessed growth.

In Cardiac Pacing Therapies, the Micra leadless pacemaker franchise is expected to have recorded strong growth, driven by the adoption of its latest generation, Micra AV2 and VR2. In Defibrillation Solutions, the Aurora EV-ICD’s adoption is expected to have remained strong in the fiscal third quarter.

Among the company’s Synergistic businesses, Medtronic is expected to report strong growth within the Neuromodulation segment, driven by broad-based growth across product lines, including Pain Stim and Brain Modulation. Pelvic Health, Coronary and Peripheral Vascular too are expected to have registered growth in the third quarter.

Among Medtronic’s Highest Growth Markets businesses, the company is likely to have gained traction within the Cardiac Ablation Solutions arm, driven by the strong sales of Pulse Field ablation products, which are more than offsetting declines in the cryoablation product line.

Medtronic’s Diabetes unit likely experienced strong growth in the United States in the fiscal third quarter, with the global adoption of the MiniMed 780G AID system driving performance. Further, Simplera Sync sensor and the newly FDA-approved InPen app (which paved the way for a limited U.S. release of the SMART MDI system with Simplera CGM) might have boosted growth in the fiscal third quarter. Despite issues related to battery life of MiniMed 600 and 700 series, the company might have witnessed a positive top-line contribution in the fiscal third quarter from this business.

What Does Our Model Say?

Our proven model does not conclusively predict an earnings beat for Medtronic this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. However, that’s not the case here.

MDT has an Earnings ESP of 0.00% and carries a Zacks Rank of 3 currently. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Bigger Picture

In recent years, the company has made some foundational changes to the organization, including streamlining the operating model, improving global operations, supply chain and quality, and bringing in expertise from outside the industry. It is actively allocating capital to fast-growth MedTech markets and fueling innovative technologies in areas like robotics, AI and closed-loop systems that ensure its growth over the next decade.

Medtronic’s revenues have improved and become more durable from implementing a performance-driven culture and changing incentives underlying the new product approvals in major markets. With top priority placed on restoring the company’s earnings power, these actions are expected to eventually result in better-leveraged earnings growth through margin stabilization and improvement. 

Medtronic’s highest growth opportunities, comprising 20% of its revenues, are in markets that are large and growing faster than the overall company. For example, in Cardiac Ablation, it has significantly invested in the Electrophysiology arm to expand its share in the attractive $8 billion-plus market.

MDT's Impressive Liquidity and Solvency Position

Medtronic’s strong liquidity position should allow it to meet its near-term debt obligations. Medtronic apparently looks quite burdened by debt, with total debt (including the current portion) of $28.30 billion as of Oct 31, 2024. The company’s cash and cash equivalents were $7.99 billion at the end of the last-reported quarter.

Although the quarter’s total debt was much higher than the corresponding cash and cash equivalent level, the short-term payable debt of $3.72 billion remains lower than the short-term cash level. The company’s times interest earned ratio too is at an impressive level of 7.7 indicating that Medtronic is well capable of paying the interest on its business debts on time.

Medtronic Shares Outperform Industry and S&P

In the fiscal third quarter, Medtronic stock declined 10.5% compared with the industry’s 4% drop. In contrast, the S&P 500 rose 4.1%. The company also underperformed its direct peers, such as Abbott’s ABT 0.1% rise and Boston Scientific’s BSX 6.2% rise during this time span.

Fiscal Q3 Price Comparison

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Medtronic Trading Cheaper Than Industry, S&P

Going by the Price/Earnings ratio, MDT shares currently trade at 15.74X forward earnings, well short of its five-year high of 30.08X and below the median of 16.56X. The stock is also trading significantly below the industry’s 22.73X and S&P 500’s 22.54X.

The company is also trading at a significant discount to other industry players like Boston Scientific, with its current P/E being 36.71X, and Abbott, whose current P/E is 25.19X. This suggests that investors may be paying a lower price relative to the company's expected earnings growth.

MDT has a Value Score of C at present.

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To Conclude

While Medtronic holds immense potential for long-term growth, given its momentum, ongoing comprehensive transformation, breakthrough innovations and exposure to strong secular growth markets, the company battles significant headwinds from macroeconomic issues and rising expenses, which can significantly dent its bottom-line growth.

Further, we are also concerned about the product recall issue, which could erode patient trust in Medtronic's diabetes care offerings. For now, it might be prudent for investors to avoid buying the stock and monitor MDT’s upcoming results for a better entry point.

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