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Stuck at 2800: Zacks March Market Strategy

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Ireland-based medical device major Medtronic plc MDT is slated to report its first-quarter fiscal 2017 earnings on Aug 25, before the opening bell.

Last quarter, the company delivered earnings of $1.27 per share, surpassing the Zacks Consensus Estimate by a penny. In fact, Medtronic’s earnings have outpaced the Zacks Consensus Estimate in three out of the past four quarters, with an average beat of 1.2%. Let’s see how things are shaping up prior to this announcement. 

Factors at Play

Despite the fact that Medtronic continues to be plagued by strong foreign exchange headwinds, the company’s robust operations indicate a brighter start to fiscal 2017.

The company, in its fiscal fourth-quarter earnings call, noted that revenue growth for the first quarter will remain at the lower half of its annual revenue outlook range of 5% to 6% at CER on a constant week basis. First quarter earnings per share on a constant week basis should remain around the upper end of the company’s annual earnings per share growth guidance range of 12% to 16%.

MEDTRONIC Price and EPS Surprise


MEDTRONIC Price and EPS Surprise | MEDTRONIC Quote

Operating margin is also anticipated to continue the uptrend witnessed through 2016. While Covidien synergy is estimated to decelerate a bit, the operating leverage from the rest of the business is expected to be exceptionally well.

We are optimistic on this balanced growth performance across all the business groups of Medtronic, and expect the same to be exhibited in the first quarter itself. We also anticipate Medtronic to witness strong share gains from the flow of recent product launches, which should also get reflected in the first quarter performance.

Within the Minimally Invasive Technologies Group (MITG), Medtronic continues to grow through tuck-in acquisitions. In addition to Bellco, in May, the business acquired Smith & Nephews’ highly profitable and fast growing gynecology business including a minimally invasive surgical solution. We expect this acquisition to be accretive to Medtronic’s surgical solutions segment within MITG from the beginning of 2017.

However, the company’s prediction on the impact of currency movement continues to pose a threat.

According to Medtronic, negative impact from foreign currency translation in the first quarter is expected to the tune of approximately $25 to $75 million based on current exchange rates on revenues.

Over the past few quarters, Medtronic’s core Spine revenues have been a major disappointment, persistently underperforming the broader market growth. Although, of late the company witnessed growth in international Core Spine and U.S. BMP, severe weakness in U.S. Core Spine continues to act as a dampener.

However, with the recent realignment of RTG commercial sales management, the implementation of the surgical synergy programs and the numerous recent and upcoming product launches, Medtronic strongly anticipates a change of trend in the U.S. core Spine performance down the line. 

Earnings Whispers

Our proven model does not conclusively show that Medtronic is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Medtronic has an Earnings ESP of 0.00%. That is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.01.

Zacks Rank: Medtronic has a Zacks Rank #3 which increases the predictive power of ESP. However, a 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows these have the right combination of elements to post an earnings beat this quarter:

The Bank of Nova Scotia BNS, with an Earnings ESP of +1.75% and a Zacks Rank #2.

Dollar Tree, Inc. DLTR, with an Earnings ESP of +4.11% and a Zacks Rank #2.

The Cooper Companies Inc. COO, with an Earnings ESP of +0.44% and a Zacks Rank #3.

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