Earnings Preview: Medtronic

Leading medical devices company Medtronic (MDT - Analyst Report) is scheduled to report its third quarter of fiscal 2012 results before the market opens on Tuesday, February 21, 2012. The company is expected to earn an EPS of 84 cents on revenues of $4.029 billion during the quarter, according to the Zacks Consensus Estimate.

Medtronic exceeded its expectations in two of the last four quarters. The four-quarter positive surprise of 0.94% implies that the company has surpassed the Zacks Consensus Estimate by this magnitude over the last four quarters.

Previous Quarter Highlights

Medtronic reported an adjusted EPS of 84 cents in the second quarter of fiscal 2012, a couple of cents ahead of the Zacks Consensus Estimate and the year-ago quarter. Revenues were $4.132 billion in the quarter, up 6% year over year (up 3% at constant exchange rates or CER) and higher than the Zacks Consensus Estimate of $4.066 billion.

Medtronic’s seven divisions – CRDM, Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control – generated corresponding sales of $1.268 billion (up 2% year over year but down 2% at CER), $839 million (down 1% or down 3% at CER), $830 million (up 12% or 8% at CER), $421 million (up 9% or 6% at CER), $367 million (up 13% or 10% at CER), $298 million (up 22% or 20% at CER) and $109 million (flat or down 3% at CER). The company has decided to sell its Physio-Control business to Bain Capital for $487 million in cash.

Agreement of Estimate Revisions

Estimate revision trends among the analysts for the third quarter and the fiscal have been on the downside. Over the last 30 days, out of 21 analysts covering the stock, 3 lowered their estimates for the quarter while only 1 moved in the opposite direction. A similar situation applies for the fiscal with 2 downward revisions over the past month and none raising their estimates.

The decline in estimates reflects the issues troubling the company’s core businesses and the current economic uncertainties. The biggest segment at Medtronic, CRDMhas been affected by physician reaction to a study result published by the Journal of the American Medical Association regarding evidence-based guidelines for ICD implants and US Department of Justice’s investigation into hospitals' ICD implants.

This situation is taking its toll across the industry as reflected in the recently reported results of Medtronic’s peers, Boston Scientific (BSX - Analyst Report) and St Jude Medical (STJ - Analyst Report). Moreover, the Spinal segment is also witnessing several headwinds such as pricing pressure and decline in procedure volume.

We also expect an update regarding the US trial of Medtronic’s CoreValve system. This is significant since Edwards Lifesciences (EW - Analyst Report) has already received approval from the US Food and Drug Administration for its Sapien transcatheter heart valve (“THV”). Over and above, Medtronic’s prominent presence in the European market, which is shrouded in macroeconomic challenges, might affect the company’s sales growth.   

Although recent product launches in the CRDM business will provide some incremental sales, Medtronic’s top line would continue to remain under pressure. This might force the company to revise its guidance for fiscal 2012. The current Zacks Consensus Estimate for the fiscal stands at an EPS of $3.45 on revenues of $16.534 billion. However, the continuous share buyback program and restructuring initiatives undertaken by the company might be a cushion to the bottom line.

Magnitude of Estimate Revisions

Given nominal estimate revisions from the analyst community, though tinged with doubt, over the past 30-day period, the consensus estimate for the current quarter dropped by a penny to 84 cents. However, the consensus estimate for fiscal 2012 remained static at $3.45 over the past month.

Recommendation

Having witnessed several headwinds in its two biggest segments – CRDM and Spinal – Medtronic is trying every means to revive growth. This includes penetration of international markets, portfolio expansion and restructuring initiatives, which should benefit the company over the long term. Moreover, acquisitions done over the past few years are contributing to total revenues, a positive trend that is expected to continue. Meanwhile, Medtronic has increased its focus on the emerging markets that have been garnering significant growth.

Despite the measures, economic uncertainty is impacting procedure volume. Longer term, we have a Neutral recommendation on Medtronic. The stock retains a Zacks #3 Rank (“Hold”) in the short term.

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