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Medical device major, St. Jude Medical (STJ - Analyst Report) is slated to announce its third quarter results before the opening bell on Wednesday, October 17. The current Zacks Consensus Estimate for the third quarter is 80 cents, representing estimated year-over-year growth of 3.13%.

Second Quarter Recap

St. Jude’s second-quarter 2012 adjusted earnings per share of 88 cents beat the Zacks Consensus Estimate by a penny and exceeded the year-ago earnings of 85 cents. In the quarter, reported profit inched up 1.2% to $244 million (or 78 cents a share) as lower expenses offset weak revenue generation.

The Minnesota-based medical technology giant reported net revenues of $1,410 million, down 2% year over year, beating the Zacks Consensus Estimate of $1,430 million. Sustained poor performance across the Cardiac Rhythm Management (CRM) unit and the vascular unit more than offset growth at the company’s smaller Atrial Fibrillation (AF) and Neuromodulation franchises.

Revenues from the core CRM segment dropped 6% year over year to $746 million, indicating continued softness in the CRM market. Implantable Cardioverter Defibrillator (“ICD”) revenues dipped 4%, while pacemaker sales declined 9%.

However, AF revenues grew 5%, but sales were affected by slower uptake of AF capital equipment, indicating a tough hospital spending scenario. Neuromodulation sales increased 2%, led by new products launches. The Cardiovascular franchise inched down 1%, reflecting the impact of a termination of a vascular products distribution contract in Japan.    

Estimate Revisions Trend

Agreement

There is a moderate positive bias in estimate revisions for both the September quarter and the full year. The past 7 days have seen one of eighteen estimates rise for the quarter and none moving in the opposite direction. The past 30 days have seen two of eighteen estimates rise for the quarter, and one estimate moved in the opposite direction in the same period.

The past 7 days have seen one of nineteen estimates rise for the full year 2012 move north, while none moving in the opposite direction. The past 30 days have seen three of nineteen estimates rise for the year, and one estimate moved in the opposite direction in the same period.

Magnitude

Estimates for both the third quarter and full year remained unchanged at 80 cents per share and $3.43, respectively, over the past week and month. The current Zacks Consensus Estimate for full-year 2012 is $3.43 per share, representing an estimated year-over-year growth of 4.61%.
 
With respect to earnings surprises, St. Jude has posted positive surprises in the preceding four quarters. It has delivered an average positive earnings surprise of 2.44% over the past four quarters, implying that the company has surpassed the Zacks Consensus Estimate by that measure. Third quarter earnings are also expected to meet expectations.

Our View

With a market cap of $13.37 billion, St. Jude is a leading medical device manufacturer with a solid rate of growth over the past decade. We believe that new product development and penetration into emerging markets will drive long-term growth for the company. Moreover, stabilizing trend in the U.S. ICD market and St. Jude’s continuing market share gain in the ICD space, despite the Riata lead problem, is a positive sign.

New products such as the Quadra, Ellipse, EnligHTN, Accent MRI as well as the transaortic valve replacement (TAVR) and the percutaneous mitral valve repair (PMVR) will drive market share gains and above-market growth. Moreover, recently released positive data from the FAME II clinical trial is expected to further expand the growth opportunity for the Fractional Flow Reserve (FFR) technology.

Recently, St. Jude announced that it is consolidating its four operating segments into two units to reduce operating expenses as a necessary measure to hedge against the upcoming MedTech tax from 2013. The company also changed the executive heads leading the business segments and eliminated roughly 300 employees in the process.
 
However, St. Jude expects a weak Euro, competitive pressures and risk of a sluggish market, given the ongoing difficult macroeconomic conditions to be a drag on the company’s results. St. Jude and its peers Medtronic Inc. (MDT - Analyst Report) and Boston Scientific Corporation (BSX - Analyst Report) are contending in a soft CRM market.

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 fourth quarter during the call. We are currently Neutral on the stock, which carries a short-term Zacks #3 Rank (Hold).

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