Medtronic (MDT) Plans Up to $475M of Annual Cost Savings

Medtronic plc MDT recently announced a significant cost-control initiative that the company is going to implement through the launch of a new operating model. In the ongoing phase of operational hazards and margin debacles, this initiative by the company holds a lot of significance.

According to the company’s SEC filings on Sep 1, it is implementing a new operating model with the initiation of a Simplification Restructuring Program. The transition to this new model will begin in  third-quarter fiscal 2021 and will be fully effective from the start of the fiscal fourth quarter.

Aim of the Restructuring Program

This program is going to result in cost savings from fiscal 2021. The annualized cost savings will be approximately $450-$475 million, expected to be realized by fiscal 2023. The implementation of the program is expected to incur total pre-tax costs of approximately $400-$450 million, the majority of which will be recognized by the end of fiscal 2022.

According to Medtronic, execution of this restructuring plan will enable reinvestment, thereby driving future revenue growth and strengthening the company’s ability to deliver strong long-term earnings per share growth.

Glimpse of the New Operating Model

Medtronic claims that the new operating model will make it more focused in terms of speeding up research and development, and improving customer experience. Further, it will help to accelerate revenue growth, win market share, and effectively leverage its enterprise scale. This new operating model is also expected to simplify Medtronic’s organizational structure and accelerate decision-making and execution.

As part of the new operating model, Operating Unit (OU) leaders will have decision-making authority and full responsibility and accountability for their individual businesses. Specifically, OU leaders will have full profit and loss responsibility. They will control their own product development and clinical resources, and direct their own sales organizations in the company’s larger geographies.

Medtronic management plans to discuss its new operating model at its virtual Investor Day on Oct 14, 2020.

Share Price Performance

Over the past three months, Medtronic has outperformed the industry it belongs to. The stock has risen 10.7% compared with the industry's 5.7% rise.

Our Take

On the company’s first-quarter fiscal 2021earnings calllast week, Medtronic’s plans of this new operating model were revealed. CEO Geoff Martha termed this initiative as ‘New Medtronic’ that will help the company in becoming a more nimble and competitive organization.

Amid the pandemic, Medtronic’s core segments are facing challenges like delay in deferrable procedures and loss of large bulk purchase orders due to depressed demand. As the COVID-19-led uncertainty might continue through a few more quarters, the launch of this new model, which is expected to make a favorable impact in fiscal 2021, is something that investors will look forward to.

Zacks Rank & Key Picks

Currently, Medtronic carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the broader medical space are QIAGEN N.V. QGEN, Thermo Fisher Scientific Inc. TMO and Hologic, Inc. HOLX.

QIAGEN’s long-term earnings growth rate is estimated to be 22.3%. It currently sports a Zacks Rank #1. (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Thermo Fisher’s long-term earnings growth is estimated at 15%. It currently carries a Zacks Rank #2 (Buy).

Hologic’s long-term earnings growth rate is estimated to be 15.5%. The company presently sports a Zacks Rank #1.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.