Morning Note: Market news and an update from Medtronic.

Market News

US equities closed slightly lower last night – S&P 500 (-0.2%); Nasdaq (-0.3%) – ending the 8-day rally that brought the indices back to near-record highs. Ahead of key US payroll data and further clues on interest rate cuts from Federal Reserve meeting minutes, 10-year Treasury yields drifted lower to 3.81%. Traders are also looking ahead to Fed Chair Powell's speech at the Jackson Hole Symposium on Friday for further guidance. At $2,515 an ounce, gold remains close to its all-time high, while the dollar trades at its 2024 lows.

In Asia this morning also slipped – Nikkei 225 (-0.3%); Hang Seng (-1.0%); Shanghai Composite (-0.3%) – as technology stocks dipped on Walmart Inc.’s planned sale of its stake in JD.com. Chinese EV makers decline after the EU advanced plans for tariffs on vehicles shipped from China that are below the rates previously announced for most parties.

The FTSE 100 is currently little changed at 8,277, while Sterling trades at $1.3020 and €1.1710. The combination of housebuilders Barratt Developments and Redrow through a scheme of arrangement is expected to become effective later today. As a result, today will be the last day of dealings in, and for the registration and transfer of, Redrow shares.

The oil price remains subdued – Brent Crude is $76.75 a barrel – as US crude inventories increased by 347,000 barrels last week.

According to CBO, Harris’ economic plan is estimated to cost $1.95tn over 10 years, boosting the adjusted deficit to 6.9% of GDP by 2034, twice the average of 3.7% over the previous 50 years.

Source: Bloomberg

Company News

Yesterday afternoon, Medtronic released results for the three months ended 26 July 2024, the first quarter of its financial year to end-April 2025. The figures were slightly above market expectations, and the company raised its guidance for the full year. In response, the stock was little changed in US trading hours.

Medtronic is one the largest medical device companies in the world, with products to treat 70 health conditions, including cardiac devices, cranial and spine robotics, insulin pumps, surgical tools, and patient monitoring systems. In its last financial year, the group generated sales of more than $32bn.

During the latest quarter, the group benefitted from healthy underlying markets and new product innovation. Revenue increased by 5.3% on an organic basis to $8.0bn, the 7th quarter in a row of mid-single digit revenue growth. The result was a touch ahead of the market expectation ($7.9bn) and the previous quarter (+5.4%). Growth was broad-based, with multiple franchises delivering, with growth acceleration in Cardiac Ablation Solutions and Neuromodulation and continued strength in Spine, Structural Heart, and Diabetes.

By region, US revenue rose by 4.1% in organic terms to $4.1bn, lagging international markets which grew 6.5% to $3.8bn.

The business is split into four ‘portfolios’: Cardiovascular (37% of FY2024 revenue); Neuroscience (29%); Medical Surgical (26%); and Diabetes (8%). During the latest quarter:

·       Cardiovascular revenue grew by 6.9% in organic terms, with a high single-digit increase in Structural Heart & Aortic and Cardiac Rhythm & Heart Failure, and a mid-single-digit increase in Coronary & Peripheral Vascular.

·       Neuroscience grew by 5.3% in organic terms, with a low double-digit increase in Neuromodulation, a mid-single-digit increase in Cranial & Spinal Technologies, and low single digit increase in Specialty Therapies.

·       Medical Surgical rose by 1.0%, with a low single-digit increase in Surgical & Endoscopy and a flat result in Acute Care & Monitoring.

·       Diabetes revenue grew by 12.6% in organic terms, driven by mid-teens growth in the US.

Medtronic continues to take actions to improve the overall performance of the company, including streamlining its organisational structure and strengthening its supply chain. Last year, the group completed the divestiture of its Renal Care Solutions business.

The company is seeing early benefits of COGS efficiency efforts, with the gross margin up 30 basis points to 65.9%. The operating margin rose by 60 basis points to 24.4%. EPS rose by 7.5% at constant exchange rates to $1.23, better than the market forecast of $1.20 and the company guidance of $1.19-$1.21, helped by a lower interest expense.

Free cash flow slipped from $521m to $466m, while net debt moved up from $17bn to $20bn. The group is undertaking the largest planned R&D increase in its history (+10%) to accelerate long-term growth and capitalise on a long list of opportunities. There have been around 130 new product approvals in the last year or so, with several just starting, or yet to contribute, to growth.

The company remains committed to returning a minimum of 50% of free cash flow to shareholders, primarily through dividends and share repurchases. The company is a constituent of the S&P 500 Dividend Aristocrats Index, having increased its payout for 47 consecutive years. The latest annual payment is expected to be $2.80 per share, up 1.4%, and equating to a yield of 3.3%. During the quarter, the company also bought back $1.5bn of its shares.

The business will be driven by the beginning of new product cycles in some of MedTech’s most attractive markets, which is further enhanced as the company applies AI across its portfolio.

Despite being only one quarter through the financial year, the company is nudging up its guidance. In the financial year to end-April 2025, organic revenue is now expected to grow by 4.5%-5.0%, versus 4%-5% previously. Adjusted EPS is expected to be $5.42-$5.50, versus $5.40-$5.50 previously, up 9%-11% in constant currency.

Source: Bloomberg