St. Jude Squeaks Past Estimates

St. Jude Medical (STJ - Analyst Report) continues its positive earnings surprise streak as the Minnesota-based medical technology giant has posted adjusted earnings per share of 78 cents in third-quarter 2011, surpassing the Zacks Consensus Estimate by a couple of cents and the year-ago earnings of 72 cents.

The adjusted earnings exclude charges (of $21 million) related to the restructuring of certain activities at the company’s Cardiac Rhythm Management (“CRM”) division, employee termination and improvement of overseas sales infrastructure.

It also excludes a $9 million charge associated with collection risk for accounts receivable related to one Europe-based customer. Profit, as reported, climbed 8.7% year over year to $226.5 million (or 69 cents a share) as healthy sales overshadowed these special charges.

Revenues

Revenues shot up 11.5% year over year (up 6% in constant currency) to $1,383 million, also beating the Zacks Consensus Estimate of $1,370 million. The growth was led by healthy double-digit revenue expansion across the company’s Cardiovascular and Atrial Fibrillation businesses. Foreign currency swings contributed roughly $73 million to the top line.

Segment Highlights

Revenues from the core CRM division edged up 2% year over year to $751 million. ICD sales inched up 1% year over year to $445 million while pacemaker revenues improved 2% to $306 million.

St. Jude and its compatriots Medtronic (MDT - Analyst Report) and Boston Scientific (BSX - Analyst Report) are contending in a soft CRM market. The beleaguered U.S. ICD market, as reflected by sustained implant volume pressure, continues to hamstrung St. Jude's CRM results.

ICD volume growth has been encumbered by a number of factors including the U.S. Department of Justice’s investigation into hospitals' ICD implant practices. Boston Scientific, which is due to unveil its third quarter results on October 20, will throw more light on conditions/trends in the ICD market.

Atrial Fibrillation revenues soared 20% year over year to $202 million while Neuromodulation sales rose 10% to $102 million. The cardiovascular franchise had yet another robust quarter with revenues ballooning 37% year over year to $328 million, boosted by the contributions of AGA Medical which St. Jude bought last year.

Within Cardiovascular, vascular products sales jumped 10% to $177 million. Structural heart product revenues skyrocketed 91% to $151 million riding on the addition of the AGA Medical product lines.

Margins

Gross margin improved to 73.2% from 72.6% a year ago as higher cost of sales was more than offset by top line growth. Selling, general and administrative expenses, as a percentage of sales, rose to 36.5% from 35.4% a year-ago.

Research and development expenses (as a percentage of sales) increased to 12.8% from 12.1%. Operating margins declined to 22.4% from 24.1% a year ago, impacted by special charges.

Financial Condition

St. Jude exited the quarter with cash and cash equivalents of $959.5 million, a roughly 13% year over year increase. However, long-term debt increased nearly 47% year over year to $2,917.2 million.

Outlook and Recommendation

St. Jude has tweaked its earnings forecast for fiscal 2011. The company now expects adjusted earnings per share of $3.26-$3.28 for the full year versus its earlier forecast of $3.25-$3.30. For the fourth quarter, St. Jude expects adjusted earnings per share in the range of 83 cents to 85 cents. The current Zacks Consensus Estimates for fourth quarter and fiscal 2011 are 86 cents and $3.27, respectively.

We are impressed with St. Jude’s solid fundamentals, strong product mix and healthy growth trajectory. A spate of new growth drivers are expected to offer opportunities for accelerated sales growth over the next few years.  

However, we remain wary about competition-driven pricing pressure and a soft CRM market which may continue to pester the company through 2011. Our long-term Neutral recommendation on the stock is backed by a short-term Zacks #3 Rank (Hold).

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