“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, April 06, 2020

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

ALSO

"Trading Capital Management"



Option Trade – Medtronic plc. Ordinary Shares (NYSE:MDT) Calls

Tuesday, April 07, 2020

** OPTION TRADE: Buy MDT JUN 19 2020 100.000 CALL at approximately $4.00. (BID price at this time is $3.45 – ASK is $4.50)

Place a pre-determined sell at $8.00.

Also include a protective stop loss of $1.60.

Preamble.....

The COVID-19 pandemic has taken the U.S. economy from near-record-low unemployment to mass layoffs and firings.

It’s too soon to predict a rebound, but there are quality companies available now at discounted prices, setting up money-making opportunities. And, one such company is the Ireland-based medical device major Medtronic PLC (NYSE:MDT).

Medtronic makes medical devices, including pacemakers, surgical devices, implants and diabetes pumps. The stock is down 24% this year, in part because these products are expensive, and you don’t use their products unless you need to. So the recessionary environment, the delay in elective surgeries as health-care providers’ focus on COVID-19 and fear of going to a hospital are all combining to hurt sales.

But, the novel coronavirus crisis is creating a tremendous need for ventilators. And Medtronic is one company that makes those coveted devices. Further, the company’s sales for its cardiac and vascular unit, which houses its ventilator business, should climb meaningfully during the crisis. This sales spike should boost Medtronic stock.

The company’s ventilators cost between $5,000 and $50,000 each. Given the high price of Medtronic’s ventilators, there’s an excellent chance that the company’s profit margin on them is high.

Consequently, during the crisis, the higher demand for ventilators should help the company’s bottom line.

Further, Medtronic’s customer base consists of hospitals and doctors.

And hospitals are open for business during the coronavirus crisis.

Moreover, the nation’s hospitals will receive a cumulative $100 billion from the federal government, so they will have plenty of money to buy Medtronic’s products.

Analysts Thoughts.....

As many analysts have noted, medical practices will cancel or postpone some of their patients’ elective surgeries. This will lower demand for a portion of Medtronic’s products. But a decline in elective surgeries will not make a significant dent in Medtronic’s overall demand.

For example, its cardiac and vascular unit historically generates nearly 38% of its revenue. Many of the surgeries that fall under this unit are not elective. Moreover, the coronavirus affects the heart and lungs.

And diabetes, which accounts for nearly 8% of the company’s revenue, can also be life-threatening. The biggest wildcard is the company’s restorative therapies unit, “which includes devices and implants for spine, musculoskeletal, brain and nerve conditions” and generates 27% of Medtronic’s revenue.

Shares of Medtronic have earned a consensus recommendation of “Buy” from the twenty-seven research firms that are covering the stock, MarketBeat.com reports. Two equities research analysts have rated the stock with a sell rating, four have assigned a hold rating and twenty-one have assigned a buy rating to the company. The average 12 month price objective among brokers that have issued ratings on the stock in the last year is $122.00.

Several equities analysts have recently commented on the company…..

  • Guggenheim upgraded Medtronic from a “neutral” rating to a “buy” rating and set a $135.00 target price on the stock in a research report on Thursday, January 2nd. They noted that the move was a valuation call.
  • JPMorgan Chase & Co. upped their price objective on shares of Medtronic from $122.00 to $128.00 and gave the company an “overweight” rating in a research report on Friday, December 20th.
  • Morgan Stanley lowered their price objective on shares of Medtronic from $123.00 to $112.00 and set an “equal weight” rating for the company in a research report on Friday, March 27th.
  • BTIG Research lowered their price objective on shares of Medtronic from $124.00 to $102.00 and set a “buy” rating for the company in a research report on Monday.
  • Piper Sandler restated a “buy” rating and issued a $135.00 price objective on shares of Medtronic in a research report on Tuesday, February 18th.
  • Finally, UBS Group upped their price objective on shares of Medtronic from $127.00 to $130.00 and gave the company a “buy” rating in a research report on Thursday, January 16th.

So…..

Expect increases in the revenue of the company’s cardiac and vascular group to offset and possibly slightly exceed the revenue losses of its other units. As a result, expect the entire company’s revenue in the first and second quarters to be anywhere from 10% below to 10% above its normal levels.

Moreover, after the crisis is over, expect it to benefit from a huge surge in elective surgeries and continued high demand for its ventilators as governments and hospitals around the world look to stockpile them for next fall.

Medtronic PLC has a twelve month low of $72.13 and a twelve month high of $122.15. The stock has a market cap of $112.72 billion, a price-to-earnings ratio of 21.90, and a PEG ratio of 2.16 and a beta of 0.70. The company’s 50 day simple moving average is $97.80 and its 200 day simple moving average is $108.51. The company has a debt-to-equity ratio of 0.48, a quick ratio of 2.28 and a current ratio of 2.75.