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Medtronic Stock Falls on Mixed 2Q; Positive on HeartWare Buy

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On Nov 30, 2016, we issued an updated research report on medical device major, Medtronic plc (MDT - Free Report) .

In the past six months, Medtronic outperformed the broader industry trend with respect to price performance. The trend, however, was disrupted in mid-November when it released mixed second-quarter fiscal 2017 results. While earnings edged past the Zacks Consensus Estimate, revenues failed to meet the same. Escalating costs and expenses weighed on margins.

The lowered guidance for fiscal 2017 is all the more disappointing, indicating slim chances of recovery down the line. The company witnessed a slump in its share price, since the release of the quarterly results, significantly underperforming the broader Medical Products Market. Per the last share price movement, overall the company lost 13.33%, much wider than 6.98% loss of the broader industry over the last six months.

 

On a positive note, a consistent and gradually stabilizing movement in the global Cardiac Rhythm & Heart Failure (CRHF) market can be observed. This should improve further, over the coming quarters.

We are also looking forward to Medtronic’s mega $1.1 billion agreement to buy Heartware International. The deal is expected to significantly boost its CRHF business, alongside providing a strong foothold in the global niche.

Meanwhile, post the Covidien acquisition, the consolidated company has so far successfully demonstrated strong segmental performance, reflecting successful integration and achievement of synergy targets.

This apart, we note that, despite facing severe macroeconomic pressures, Medtronic saw the emerging markets demonstrate 10% growth in the last reported quarter which contributed nearly 120 basis points to the company’s overall revenue growth. However, while the growth was strong, it remained below the company’s 150−200 basis points expectation, primarily due to dismal sales performance in the Middle East where revenue declined in the mid-single-digits on falling oil prices.

The company is currently resorting to all possible means to boost growth. This includes penetrating the emerging markets, expansion of its portfolio and restructuring of initiatives. These should benefit Medtronic over the long term. We are also encouraged by its recent foray into the rapidly growing transcatheter mitral valve replacement market through its recently completed $458 million acquisition of California-based medical device start-up firm, Twelve, Inc.

At present, Medtronic carries a Zacks Rank #3 (Hold).

Key Picks

Some stocks that warrant a look in the medical sector include NxStage Medical Inc. (NXTM - Free Report) , Baxter International Inc. (BAX - Free Report) and Bovie Medical Corporation (BVX - Free Report) . NxStage Medical and Baxter International sport a Zacks Rank #1 (Strong Buy) while Bovie Medical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NxStage Medical surged 22.5% over the last year compared with the S&P 500’s 6.9% growth over the same period. The company has a four-quarter average positive earnings surprise of 50.00%.

Baxter International rallied 18.3% over the past year, much higher than the S&P 500. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 116.5% gain in the past year, way better than the S&P 500. The company has a trailing four-quarter positive average earnings surprise of 28.7%.

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