Medication Technology Corporation's Shares Should Be Sold, Suggests one Financial Advisor on Wall Street
A fortnight ago, medical equipment manufacturer Medtronic surpassed the projected sales and earnings by Wall Street's standards. Despite this accomplishment and providing guidance that largely aligned with analysts' expectations, Medtronic's shares saw a decline in value.
At that point, I suggested this was an astute move because Medtronic's earnings growth was insufficient to justify the company's elevated valuation. Subsequently, Goldman Sachs concurred with my perspective, assigning a sell rating and a $83 price target to Medtronic's shares.
Is Medtronic's stock a selling point?
You might have observed that Medtronic's shares began the day on Thursday at a price below $82, suggesting that an $83 price target indicates potential growth this year, not a decrease. You might also ponder why a stock increasing in value merits a sell rating.
The explanation lies in their valuation. Medtronic's shares currently trade at nearly 30 times earnings, which is rather substantial considering analysts forecast a 4.9% annual growth in earnings over the next five years as per a poll conducted by S&P Global Market Intelligence. Even Medtronic's 3.4% dividend yield does not suffice to make the stock an attractive buy.
More disheartening news for investors: Goldman Sachs underscores Medtronic's main issue is its slow growth rate. In its Thursday note, the analyst warned that other companies are investing heavily in innovative products to spur growth, while Medtronic has kept its research and development expenditure quite constant at about $2.7 billion annually for the past three years. However, to stay competitive, Medtronic will likely need to escalate its research and development spending or face a decline in growth rates.
If Goldman and I are correct, this means higher research and development expenses for Medtronic, which could translate to lower profits in the future. With their shares already trading at a premium -- and likely to appear even more pricey as time elapses -- Goldman sees this as a reason to sell the stock, a viewpoint I share.
In light of Medtronic's slow growth rate, investors might need to consider altering their finance strategies. The company's sustained research and development expenditure of around $2.7 billion annually might need to increase to stay competitive, possibly leading to reduced profits in the future. Given Medtronic's current valuation at nearly 30 times earnings and a projected 4.9% annual growth in earnings over the next five years, some investors might find alternative investment opportunities more appealing.
