Medtronic Reiterated at Neutral

We have reaffirmed our Neutral recommendation on Medtronic (MDT - Analyst Report) following its third quarter fiscal 2012 results. Faced with a number of challenges, Medtronic’s third quarter earnings were at par with the Zacks Consensus Estimate.

Medtronic’s recently launched products brought in good sales while international markets continued to do well. However, defibrillators and Spinal, accounting for about one-third of total sales, declined 9% year over year. Management confirmed that both the ICDs and spine markets are gradually stabilizing. This would result in easier comparisons and improved performance over the coming quarters. Besides, initiatives like penetration of international markets, portfolio expansion and restructuring activities would stand Medtronic in good stead over the long term.

Acknowledging the challenges at play in its core segments, the company is in the process of launching several new products that are likely to drive growth in this difficult scenario. Among the recently launched products, the Revo MRI pacemaker created a stir in the pacing business, registering 4 points of market share gains in the US. Other products with potential include the Symplicity catheter system for renal denervation, Core Valve (US launch scheduled for fiscal 2014), the RestoreSensor spinal cord stimulator and the Enlite continuous glucose monitoring (CGM) sensor.

While the Symplicity catheter is already approved in Europe and Australia, the company is working on the US approval of the device, likely in fiscal 2015. Besides, the recent FDA approval of Resolute Integrity drug eluting stent for the treatment of coronary artery disease in patients with diabetes mellitus should boost the CardioVascular segment. Moreover, strong growth was recorded in the AF Solutions business (more than 40%) during the quarter based on the adoption of Arctic Front in Europe and its ongoing launch in the US. Although Medtronic is garnering share in the AF market, the growth is likely to moderate in the fourth quarter with the anniversary of the US launch of Arctic Front.

We are also encouraged by Medtronic’s focus on globalization due to the opportunity rife in international destinations, especially in the emerging markets. This strategy has been adopted by other players in the MedTech space such as Boston Scientific (BSX - Analyst Report) and St Jude Medical (STJ - Analyst Report), among others. Emerging markets, a key focus for the company, recorded 16% growth during the quarter, a trend that is expected to continue over the forthcoming period. Growth in Greater China was however affected by the timing of the Chinese New Year in the quarter. The company stated that the situation would improve in the next quarter.

Our Neutral recommendation is backed by a Zacks #3 Rank (Hold) in the short term.