Earnings Preview: St. Jude Medical

Medical device major St. Jude Medical ( STJ - Analyst Report ) is slated to announce its second quarter results before the opening bell on Wednesday, July 18. The current Zacks Consensus Estimate for the second quarter is 87 cents, representing estimated year-over-year growth of 2.35%.

First Quarter Recap

St. Jude’s first-quarter 2012 adjusted earnings per share of 86 cents beat the Zacks Consensus Estimate of 83 cents and surpassed the year-ago earnings of 80 cents. In the quarter, reported profit dropped 9% to $212 million (or 67 cents a share).

The Minnesota-based medical technology giant reported net revenues of $1,395 million, up 1% year over year, beating the Zacks Consensus Estimate of $1,383 million. Strong growth across the company’s smaller Atrial Fibrillation (AF) and Neuromodulation segments were largely offset by the decline in the core Cardiac Rhythm Management (“CRM”) division.

Revenues from the soft CRM segment, St. Jude’s mainstay, dropped 4% year over year to $735 million. Implantable Cardioverter Defibrillator (“ICD”) revenues dipped 3% while pacemaker sales declined 4%, mainly due to the sluggish U.S. market.

On the positive side, Atrial Fibrillation revenues climbed 13% on the back of a strong product pipeline and an upbeat market. Neuromodulation sales jumped 12% attributable to increased market penetration of its products. The Cardiovascular franchise continued its healthy growth streak with sales moving up 3%.

Estimate Revisions Trend

Agreement

There is a significant negative bias in estimate revisions for both the June quarter and the full year. Out of the 18 analysts covering the stock, 2 made a negative revision over the last 7 days with none moving in the opposite direction. Over the last 30 days, there were 4 downward revisions with no reverse movement.

A similar pattern was repeated for fiscal 2012 estimates with 2 downward movement over the past week, out of 20 analysts. However, over the last 30 days, 7 analysts downgraded their estimates with no upward drift.

Magnitude

While estimates for the second quarter remained unchanged (at 87 cents per share) over the past week and month, estimates for 2012 dropped by a penny to the current level of $3.46 over the last 30 days. The company continues to be adversely affected by the soft CRM market and the weak U.S. ICD sales, which are expected to be a drag on 2012 results.

The current Zacks Consensus Estimate for fiscal 2012 is $3.46 per share, representing estimated year-over-year growth of 5.43%.

With respect to earnings surprises, St. Jude has posted positive surprises in the preceding four quarters. St. Jude has delivered an average positive earnings surprise of 2.45% over the past four quarters. Second quarter earnings are also expected to meet expectations.

Our View

St. Jude is consistently producing revenue growth and positive earnings surprises over the past several quarters. Despite the weak global economy, the company had revised its earnings forecast for fiscal 2012 to the range of $3.44 – $3.49 per share from the earlier band of $3.43 – $3.48. We are impressed by its solid fundamentals, healthy growth trajectory, strong product mix, robust pipeline and cost management initiatives.

We remain impressed by St. Jude’s ability to deliver consistent top-line growth and believe that its June quarter results will be supported by new products. A spate of new growth drivers (including new products and emerging markets) is expected to offer opportunities for accelerated sales growth over the next few years.

During the quarter, St. Jude’s Cardiovascular business achieved two milestones. In May, the company received CE Mark approval for its EnligHTN renal denervation system for treating patients with hypertension. Physicians at St. Jude’s cardiovascular unit believe that this alternative form of treatment of resistant hypertension represents a significant advancement in the field of medical science.

In June 2012, the company announced U.S. Food and Drug Administration (FDA) approval for its Amplatzer Vascular Plug 4 (“AVP4”) device in the U.S. With roughly 50,000 peripheral embolization procedures performed every year, St. Jude’s Cardiovascular division is poised to considerably benefit from the new product, which is the first of its kind in the medical vascular products market.

Also worth mentioning in this context is the limited impact of negative data on Durata on the company’s performance during the reported quarter. However, we are wary of investor reactions due to the highly sensitive nature of the product in the soft ICD market.

St. Jude and its peers Medtronic ( MDT - Analyst Report ) and Boston Scientific ( BSX - Analyst Report ) are contending in a soft CRM market. A still choppy U.S. defibrillator market continues to weigh on the company’s CRM results. We expect the company to offer some visibility on the prevailing CRM market condition/trends, and update on its pipeline as well as guidance for the third quarter during the call. We are currently Neutral on the stock, which carries a short-term Zacks #3 Rank (Hold).