Medtronic Stock Is a Sell, According to 1 Wall Street Analyst

One week ago, medical device maker Medtronic (MDT -1.09%) surpassed Wall Street’s sales and earnings targets. Despite the earnings beat, and despite giving guidance that mostly matched analysts’ expectations, Medtronic stock traded down on the news.

At the time, I said this was the right call because Medtronic’s earnings growth simply wasn’t strong enough to support the company’s rich valuation. On Thursday, Goldman Sachs agreed with me, initiating coverage of Medtronic stock with a sell rating and an $83 price target.

Is Medtronic stock a sell?

You may have noticed that Medtronic’s stock opened the day below $82 a share on Thursday, such that an $83 price target implies the stock will go up this year, not down. And you may wonder why a stock going up deserves a sell rating.

Well, the reason is this: Medtronic stock currently costs nearly 30 times earnings, which is quite a lot for a company that analysts think will grow earnings by less than 5% annually over the next five years (according to a poll by S&P Global Market Intelligence). Even Medtronic’s big 3.4% dividend yield isn’t big enough to square that circle and make the stock look like a bargain.

Worse news for investors: Goldman Sachs agrees with me that Medtronic’s big problem is that it’s not growing fast enough. In its note Thursday, the analyst warned that Medtronic’s competitors are investing heavily in new products to drive growth. In contrast, Medtronic has held its research and development spending relatively steady at about $2.7 billion per year for the last three years. But if it wants to keep up with the competition, Medtronic will also have to increase R&D spending or suffer slowing growth.

If Goldman and I are correct, higher R&D costs mean lower profits for Medtronic going forward. The shares are expensive already — and will probably look even more expensive as time goes by. Goldman thinks this makes the stock a sell, and I agree.