Medtronic plc (MDT Quick QuoteMDT - Free Report) reported financial results for fourth-quarter fiscal 2017. Adjusted earnings per share (EPS) in the reported quarter came in at $1.33, a couple of cents ahead of the Zacks Consensus Estimate and up 4.7% year over year. 

Adjustments in the quarter primarily included certain impact of restructuring charges, intangible asset amortization and acquisition-related items. After adjusting unfavorable foreign exchange impact of 2 cents, adjusted EPS came in at $1.35, up 6% year over year.

Without these adjustments, the company reported net income of 84 cents per share, up 7.7% year over year.

For the full year, adjusted earnings came in at $4.60 per share, a 5.3% improvement from the year-ago period.

Total Revenue

Worldwide revenues in the reported quarter grossed $7.92 billion, up 5% on a constant exchange rate or CER basis (same as reported). The top line remained ahead of the Zacks Consensus Estimate of $7.86 billion. Foreign currency fluctuation affected Medtronic’s fiscal fourth quarter revenues by $37 million.

Fiscal 2017 revenues came in at $29.71 billion, up nearly 5% at CER on constant week basis. This has also sailed past the Zacks Consensus Estimate of $29.64 billion.

In the quarter under review, U.S. sales (56% of total sales) increased 4% year over year to $4.40 billion. Non-U.S. developed market revenues totaled $2.45 billion (31% of total sales), a 4% increase at CER (up 2% as reported). Emerging markets experienced 10% revenue growth (up 11% as reported) to $1.06 billion at CER.

Segment Details

The company currently generates revenues from four major groups, viz. Cardiac & Vascular Group (CVG), Minimally Invasive Therapies Group (MITG), Restorative Therapies Group (RTG) and Diabetes Group.

CVG comprises Cardiac Rhythm & Heart Failure (CRHF), Coronary & Structural Heart (CSH), and Aortic & Peripheral Vascular divisions (APV). MITG includes both the Surgical Solutions division and the Patient Monitoring & Recovery (PMR) division. RTG includes the Spine, Brain Therapies, Specialty Therapies and Pain Therapies segments, while the Diabetes Group incorporates the Intensive Insulin Management (IIM), Non-Intensive Diabetes Therapies (NDT), and Diabetes Service & Solutions (DSS) divisions.

Revenues from CVG improved 5% at CER (or up 4% as reported) to $2.85 billion, driven by strong, balanced growth across all three divisions.

CRHF sales were $1.54 billion with 4% year-over-year growth at CER (up 3% as reported). This came on the back of growth in mid-single digit in Arrhythmia Management at CER. This apart, the HeartWare International acquisition drove growth in Heart Failure division.

CSH revenues were up 4% at CER (same on a reported basis) to $847 million on the back of mid-thirties constant currency growth in transcatheter aortic valves as a result of strong customer adoption of the CoreValve Evolut R platform.

APV revenues registered 6% growth at CER (up 5% as reported) to $457 million, driven by mid-single digit growth in Aortic and high-single digit growth in Peripheral.

In MITG, worldwide sales reached $2.61 billion, marking a 6% year-over-year increase at CER on high-single digit growth in Surgical Solutions and mid-single digit growth in PMR.

In RTG, worldwide revenues of $1.95 billion were up 5% year over year at CER (up 4% as reported) on high-single digit growth in Brain Therapies, mid-single digit growth in Specialty Therapies and low-single digit growth in Spine, thus mitigating a decline in Pain Therapies. Revenues from the Diabetes group went up 4% at CER (up 3% as reported) to $512 million.

Margins

Gross margin during the reported quarter expanded 45 basis points (bps) to 69.2% on 5.3% increase in gross profit to $5.48 billion. Adjusted operating margin improved 6 bps year over year to 30.3%. This was owing to a 5% rise in selling, general and administrative expenses (to $2.48 billion) which was offset by a 3.8% decline in research and development expenses (to $553 million). Other expenses in the reported quarter was $48 million as compared to Other income of $21 million in the year-ago period.

Guidance

Medtronic has also provided its initial fiscal 2018 revenues and EPS guidance. The company expects full-year revenues to grow in the range of 4-5% at CER. Foreign currency fluctuation this time is expected to have a positive $75-$175 million impact for the fiscal year. However for the first quarter of fiscal 2018, currency translation will adversely impact to the tune of $10-$60 million on revenues. The Zacks Consensus Estimate for revenues remains at $30.72 billion for fiscal 2018.

Fiscal 2018 adjusted earnings per share is expected to grow in the range of 9-10% at CER. Currency translation will negatively impact the full-year earnings number by approximately 5-10 cents, including the 3-5 cents’ impact in the first quarter. The Zacks Consensus Estimate is pegged at $4.93 per share.

Our Take

Medtronic’s posted better-than-expected fiscal fourth-quarter results with both earnings and revenues ahead of the Zacks Consensus Estimate. While the company demonstrated improved segmental performances at CER basis, escalating costs and expenses continue to weigh on bottom line. Also, unfavorable foreign exchange rate continues to remain a major headwind and the fiscal guidance fails to indicate any chances of respite.

On a positive note, all four major business groups contributed to solid top-line growth at CER, which highlighted sustainability across groups and regions, in addition to displaying successful integration and achievement of synergy targets. We are also encouraged by the solid growth trend, successfully continuing in the U.S. as well as the healthy global acceptance of its advanced therapies. Apart from product innovation, the company is currently focusing on geographical diversification of its businesses.

Zacks Rank & Key Picks

Medtronic currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the broader medical sector are Luminex Corp. , Inogen, Inc. (INGN Quick QuoteINGN - Free Report) and Edwards Lifesciences, Inc. (EW Quick QuoteEW - Free Report) . Notably, Luminex and Inogen sport a Zacks Rank #1 (Strong Buy), while Edwards Lifesciences carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Luminex has an expected long-term adjusted earnings growth of almost 16.3%. The stock roughly added 7.0% over the last three months.

Inogen has a long-term expected earnings growth rate of 17.5%. The stock has a solid one-year return of around 82%.

Edwards Lifesciences has an expected long-term adjusted earnings growth of almost 16% (last 3–5 years of actual earnings). The stock added roughly 14.8% over the last three months.

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