Morning Note: Market news and updates from Medtronic and Target.

Market News

Risk markets moved lower amid mounting concerns over US debt. House Republican leaders released a new version of the tax bill with tweaks designed to win over hardline conservatives. Trump floated taking Freddie Mac and Fannie Mae public to raise cash for the government.

The EU shared a revised trade proposal with the US that includes an offer to gradually reduce tariffs on some goods to zero, people familiar said

The dollar fell back to year-to-date lows, while Treasuries were weaker with the curve steepening – the 10-year currently yields 4.59%. Gold is trading slightly higher at $3,330 an ounce, while Bitcoin hit a new high of $110k. Brent Crude drifted back to $65 a barrel.

US equities moved lower last night – S&P 500 (-1.6%); Nasdaq (-1.4%) – and closed just off the session lows. A positive outlier was Alphabet (+3%) which was boosted by positive news coming out of its annual product developer conference. In Asia this morning, markets were also down: Nikkei 225 (-0.8%); Hang Seng (-0.8%); Shanghai Composite (-0.1%).

The FTSE 100 is currently 0.5% lower at 8,745. Companies trading ex-dividend include Bellway (0.77%), Bunzl (2.20%), Imperial Brands (1.43%), Kingfisher (2.78%), Tritax Big Box REIT (1.33%), and Whitbread (2.11%).

Britain’s government deficit was £20.2bn in April, more than estimated and despite the fact that a £26bn hike in payroll taxes came into effect last month. Sterling trades at $1.3430 and €1.1850, while gilt yield moved up to 4.76%.

Source: Bloomberg

Company News

Yesterday afternoon, Medtronic released results for its financial year to 25 April 2025 which were slightly above market expectations. The company enjoyed a good finish to the year and announced intent to separate its Diabetes business into new standalone public company. The group’s forward-looking guidance takes into account the expected impact of potential tariffs. In response, the stock was marked down 2%, pretty much in line with the overall market.

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. 

During the year, revenue increased by 4.9% on an organic basis to $33.5bn. In the final quarter, the business accelerated slightly, with revenue up 5.4% in organic terms to $8.93bn. Growth was a touch ahead of expectation ($8.82bn) and broad-based.

By region, in the full year, US revenue rose by 3.8% in organic terms to $17.2bn, non-US developed market revenue was up mid-single digits to $10.2bn, and emerging markets revenue by high single digits to $6.2bn.

The business is split into four ‘portfolios’: Cardiovascular (37% of revenue); Neuroscience (29%); Medical Surgical (25%); and Diabetes (8%). During the year:

·       Cardiovascular revenue grew by 6.3% in organic terms, with a high-single digit increases in Structural Heart & Aortic and Coronary & Peripheral Vascular, and low-single digit increase Cardiac Rhythm & Heart Failure.

·       Neuroscience grew by 5.2% in organic terms, with a low double-digit increase in Neuromodulation, mid-single digit increase in Cranial & Spinal Technologies and low-single digit increase in Specialty Therapies.

·       Medical Surgical rose by 0.8%, with a low-single digit increases in both Surgical & Endoscopy and Acute Care & Monitoring.

·       Diabetes revenue grew by 11.5% in organic terms.

As part of its ongoing portfolio management strategy, Medtronic announced its intent to separate its Diabetes business into a new standalone public company. The separation is expected to be completed within 18 months through a series of capital markets transactions, with a preferred path of an initial public offering (IPO) and subsequent split-off.

The company is seeing ongoing benefits of its COGS efficiency efforts, with the gross margin up 10 basis points at constant currency (CC) to 65.7%. The operating margin rose by 100 basis points at CC to 25.7%, while full-year EPS was up 6% to $5.49 at CC. In the final quarter, EPS rose by 11% to $1.62, above the market forecast of $1.58.

Annual free cash flow was unchanged at $5.2bn, with conversion of 73%. The group ended the year with net debt of $19.6bn.

The group is undertaking the largest planned R&D increase in its history to accelerate long-term growth and capitalise on a long list of opportunities. There have been around 130 new product approvals in the last 12 months, including the Sphere-9 PFA catheter, the OmniaSecure defibrillation lead, and the Avalus Ultra surgical aortic tissue valve.

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 48 consecutive years. The latest annual payment is expected to be $2.84 per share, equating to a yield of 3.4%. During the year, the company also bought back $2.7bn of its shares.

Guidance for the financial year to end-April 2026 has been provided which reflects increasing revenue growth contribution from key growth drivers, and increased investment to support their growth, leading to leveraged operating profit growth. Organic revenue is expected to grow by 5%, while adjusted EPS is expected to be $5.50-$5.60. The lower end of the EPS range assumes that the bilateral US/China tariffs resume at the higher rates following the 90-day pause, while the higher end assumes that the tariffs currently in effect during the pause remain in place through FY2026.

Source: Bloomberg

Yesterday afternoon, Target released Q1 results which were below market expectations. In response, the company has initiated a restructuring plan and cut its full-year guidance. The shares fell by 5% during yesterday’s session.

Target is a US general merchandise retailer, known for its big-box format. Last year, the group generated sales of $107bn from more than 1,900 stores and through its digital channels. The group has undertaken a multi-year strategy to transform itself in the face of fierce competition by appealing to shoppers with a compelling product line, a suite of convenience-driven fulfilment options, competitive prices, and an enjoyable shopping experience.

In the three months to 3 May 2025, in what the company describes as a ‘highly challenging environment’, sales fell by 3.8% in comparable terms to $23.8bn, below the consensus forecast for a 1% decline. Store comparable sales fell by 5.7%, with growth driven by a 2.4% decrease in traffic and 1.4% fall in average transaction amount. Digital sales rose by 4.7%.

The company has established an ‘acceleration office’ with the purpose of enabling faster decisions and execution of its core strategic initiatives in support of a return to growth.

The gross margin slipped from 28.8% to 28.2%, reflecting the net impact of merchandising activities, including higher markdown rates, as well as digital fulfillment and supply chain costs due to increased digital sales penetration and new supply chain facilities coming online. Adjusted EPS fell by 36% to $1.30 and was below the market forecast of $1.60.

The quarterly dividend was raised by 1.8%, leaving the group on track to increase its annual payout for the 54th consecutive year. The company repurchased $251m of stock in the quarter and currently has $8.4bn of remaining capacity under its repurchase programme.

The company highlighted that pricing decisions will largely depend on ongoing efforts to source more products in the US and reduce reliance on China. Given recent sales trends, the company has lowered its guidance for the full year. It now expects a low-single digit decline in sales and adjusted EPS of $7.00-$9.00.

Source: Bloomberg