Medtronic plc (NYSE:MDT) a price-to-earnings ratio (or “P/E”) of 23.9x might give the impression that this is a strong sell-off at the moment compared to the market in the United States, where about half of companies have P/E ratios below 14x and even P/E below 8x are quite common. However, the P/E may be quite high for a reason and it requires further investigation to determine if it is warranted.
While the market has seen earnings growth lately, Medtronic’s earnings have gone into reverse, which isn’t great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, existing shareholders could be extremely nervous about the viability of the stock price.
See our latest analysis for Medtronic
If you want to see what analysts predict for the future, you should check out our free Medtronic report.
Is the growth enough for Medtronic?
In order to justify its P/E ratio, Medtronic would need to produce exceptional growth well above that of the market.
If we review the last year of earnings, the company’s earnings fell a disheartening 7.2%. As a result, revenues from three years ago also fell 8.5% overall. So, unfortunately, we have to acknowledge that the company hasn’t done a great job of growing earnings over this period.
On the outlook side, the next three years should generate growth of 14% each year according to estimates by analysts who monitor the company. Meanwhile, the rest of the market is only expected to grow by 9.2% each year, which is significantly less attractive.
In light of this, it’s understandable that Medtronic’s P/E sits above the majority of other companies. It seems that most investors expect this strong future growth and are willing to pay more for the stock.
Medtronic P/E Essentials
As a general rule, we would caution against reading price-earnings ratios too broadly when making investment decisions, even though it can reveal a lot about what other market participants think of the company.
As we suspected, our review of analyst forecasts for Medtronic revealed that its better earnings outlook is contributing to its high P/E. At this point, investors believe the potential for earnings deterioration is not large enough to warrant a lower P/E ratio. Unless these conditions change, they will continue to provide strong support for the stock price.
Many other vital risk factors can be found on the company’s balance sheet. You can assess many of the main risks through us free Medtronic balance sheet analysis with six simple checks.
sure, you might also be able to find better stock than Medtronic. So you might want to see this free collection of other companies with P/Es less than 20x and strong earnings growth.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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