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Medtronic (MDT) Beats on Q2 Earnings, Ups FY20 EPS Guidance

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Medtronic plc (MDT - Free Report) reported second-quarter fiscal 2020 adjusted earnings per share (EPS) of $1.31, beating the Zacks Consensus Estimate by 2.3%. Adjusted earnings also rose 7.4% year over year.

After adjusting the foreign exchange headwind of 2 cents, adjusted EPS increased 9% year over year.

Without certain one-time adjustments including restructuring, acquisition and amortization expenses, GAAP EPS was $1.01, reflecting a 23.2% rise from the year-ago reported figure.

Total Revenues

Worldwide revenues in the reported quarter grossed $7.71 billion, up 4.1% on an organic basis (excluding the impact of currency and significant acquisitions including Titan Spine)(up 3% on a reported basis). The top line also exceeded the Zacks Consensus Estimate by a marginal 0.3%. Revenues at constant exchange rate or CER improved 4.3% in the quarter considering adjustments for a $97-million negative impact from foreign currency.

In the quarter under review, U.S. sales (54% of total revenues) inched up 2.1% year over year on a reported basis to $4.13 billion. While non-U.S. developed market revenues summed $2.32 billion (30% of total revenues), depicting a 1.4% improvement reportedly (up 4.6% at CER). Again, the emerging market revenues (16% of total revenues) amounted to $1.26 billion, up 9.4% reportedly (up 11.6% at CER).

Segment Details

The company currently generates revenues from four major groups, namely Cardiac and Vascular Group (CVG), Minimally Invasive Therapies Group (MITG), Restorative Therapies Group (RTG) and Diabetes Group.

CVG comprises Cardiac Rhythm & Heart Failure (CRHF), Coronary & Structural Heart (CSH) and Aortic & Peripheral Vascular divisions (APV). MITG includes the Surgical Innovations (SI) and the Respiratory, Gastrointestinal & Renal (RGR) divisions. RTG consists of the Spine, Brain Therapies, Specialty Therapies and Pain Therapies segments while the Diabetes Group incorporates the Intensive Insulin Management (IIM), Non-Intensive Diabetes Therapies (NDT) and Diabetes Service & Solutions (DSS) divisions.

Medtronic PLC Price, Consensus and EPS Surprise

Medtronic PLC Price, Consensus and EPS Surprise

Medtronic PLC price-consensus-eps-surprise-chart | Medtronic PLC Quote

In the fiscal second quarter, CVG revenues improved 1.3% at CER (down 0.1% as reported) to $2.86 billion, driven by high-single digit growth in CSH, offset by flat results in APV and a low-single digit decline in CRHF, all at CER.

CRHF sales totaled $1.43 billion, down 1.9% year over year at CER (down 3.1% as reported). The low-single digit’s growth in Arrhythmia Management was countered by a low-double digit fall in Heart Failure.

CSH revenues were up 7.2% at CER (up 5.4% as reported) to $955 million, driven by low-20s’ growth in transcatheter aortic valves. However, this growth was partially offset by mid-single digit’s year-over-year deterioration in drug-eluting stents sales during the quarter.

APV revenues registered a 0.2% dip at CER (down 1.3% as reported) to $474 million. A mid-single-digit’s growth in Aortic was offset by high-single digit’s decline in Peripheral.

In MITG, worldwide sales totaled $2.14 billion, marking a 6.1% year-over-year increase at CER (up 4.6% on a reported basis), banking on mid-single digit growth in both SI (Surgical Innovations) and RGR (Respiratory, Gastrointestinal & Renal).

In RTG, worldwide revenues of $2.11 billion were up 6.8% year over year at CER (up 6% as reported) on low-double digit growth in Brain Therapies, mid-single digit growth in Specialty Therapies and Spine and low-single digit growth in Pain Therapies.

Moreover, revenues at the Diabetes group increased 4.3% at CER (up 2.2% as reported) to $596 million.

Margins

Gross margin in the reported quarter contracted 162 basis points (bps) to 68.9% on 8.7% rise in the cost of revenues to $2.39 billion. Adjusted operating margin shrank 173 bps year over year to 25.2%. Meanwhile, there was a 0.5% rise in selling, general and administrative expenses (to $2.62 billion) while research and development expenses inched up 2.2% (to $603 million). Other expenses in the quarter under discussion totaled $149 million compared with the $70-million expense a year ago.

Fiscal 2020 Guidance

The company reiterated its fiscal 2020 revenue outlook. For the full year, organic revenue growth is expected to be 4%. Medtronic projects revenue rise to accelerate in the second half of the year relative to the first.

Adverse currency fluctuation is projected to affect the top line by 0.8-1.2% (unchanged). The current Zacks Consensus Estimate for revenues is pegged at $31.5 billion.

Fiscal 2020 adjusted EPS view has been raised to $5.57-$5.63 (earlier range was $5.54-$5.6). Currency volatility is expected to have a 9-cent adverse impact on the full-year adjusted EPS (earlier prediction was a negative impact of 10 cents). The Zacks Consensus Estimate of $5.56 for the metric is below the guided range.

Our Take

Medtronic exited the second quarter of fiscal 2020 with better-than-expected numbers. The company demonstrated better performances at CER, backed by growth in all major business segments and geographies. This, in turn, highlighted sustainability across groups and regions in addition to displaying a successful integration and achievement of synergy targets. Apart from product innovation, the company is focusing on geographical diversification of its businesses.

On the flip side, escalating costs and expenses persistently put pressure on the margins. Unfavorable currency movement once again deterred growth during the quarter.

Zacks Rank & Other Key Picks

Medtronic has a Zacks Rank #3 (Hold). Some better-ranked stocks with solid results this earning season are ResMed Inc (RMD - Free Report) , NuVasive, Inc (NUVA - Free Report) and Thermo Fisher Scientific Inc (TMO - Free Report) .

ResMed has a Zacks Rank #2 (Buy). The company reported first-quarter fiscal 2020 adjusted earnings per share (EPS) of 93 cents, surpassing the Zacks Consensus Estimate by 6.9%. Its revenues of $681.1 million outpaced the consensus mark by 3.7%.

NuVasive’s third-quarter 2019 adjusted EPS of 59 cents beat the Zacks Consensus Estimate by 9.3%. Its revenues totaled $290.8 million, which outpaced the consensus estimate by 2.4%. The company currently carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Thermo Fisher is Zacks #2 Ranked and delivered third-quarter 2019 adjusted EPS of $2.94, beating the Zacks Consensus Estimate by 2.1%. Its revenues of $6.27 billion exceeded the Zacks Consensus Estimate by 1.3%.

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