Medical devices major St. Jude Medical’s adjusted earnings per share of 78 cents for third-quarter 2011 beat the Zacks Consensus Estimate by a couple of cents and exceeded the year-ago earnings of 72 cents.
Third Quarter Revisited
Profit, as reported, climbed 8.7% year over year to $226.5 million (or 69 cents a share) as healthy sales overshadowed special charges related to the restructuring activities at the company’s Cardiac Rhythm Management (“CRM”) division, employee termination, collection risk for accounts receivable and improvement of overseas sales infrastructure.
Revenues soared 11.5% year over year to $1,383 million, also beating the Zacks Consensus Estimate of $1,370 million. The growth was led by double-digit revenue expansion across the company’s Cardiovascular and Atrial Fibrillation businesses.
Revenues from the core CRM division grew just 2% year over year, hamstrung by the beleaguered U.S. ICD market, as reflected by sustained implant volume pressure.
Atrial Fibrillation and Neuromodulation franchises posted healthy growth in the quarter with revenues surging 20% and 10% year over year, respectively. The cardiovascular business had yet another strong quarter with revenues zooming 37%, buoyed by the contribution from the AGA Medical acquisition. St. Jude tightened its earnings forecast for fiscal 2011.
We have discussed the quarterly results at length here: St. Jude Squeaks Past Estimates.
Agreement – Estimate Revisions
Estimates for St. Jude for fiscal 2011 reflect lack of activity over the past week with none (out of total 24 analysts) moving in either direction. Over the past month, 14 analysts have chopped their forecasts for the fiscal with 3 moving in the opposite direction.
For the fourth quarter, 17 (out of 20 analysts) have slashed their estimates over the past 30 days while one raising his/her estimate. There was a solitary downward revision over the past week with no reverse movement.
The bearish sentiment reflects management’s reduced sales forecast and narrowed earnings guidance on account of a less favorable foreign exchange environment, a soft ICD market, and delay in approval and launch of the much-anticipated quadripolar CRT-D system.
Magnitude – Consensus Estimate Trend
Estimate for fiscal 2011 has been static (at $3.27 a share) over the past week while falling by a penny over the past month. For the fourth quarter, estimate (of 84 cents) remained stationary over the last 7 days while declining by 3 cents over the past 30 days.
St. Jude in Neutral Zone
St. Jude is consistently producing revenue growth and positive earnings surprises over the past several quarters. We are impressed by its solid fundamentals, healthy growth trajectory, strong product mix, robust pipeline and cost management initiatives. A spate of new growth drivers (including new products and emerging markets) are expected to offer opportunities for accelerated sales growth over the next few years.
St. Jude is poised for incremental opportunities in CRM on the back of strong product momentum, despite soft market conditions. The company’s Fortify and Unify devices are gaining notable traction and increased penetration of these products should enable it to expand its position in CRM.
St. Jude recently commenced the European roll out of its Unify quadripolar CRT-D system and is currently awaiting approval of the product in the U.S., representing a major growth prospect. St. Jude is currently the only company to offer this technology globally.
The company’s strategic investment in cardiac devices maker CardioMEMS represents another significant opportunity to boost its technologies focused on improving heart failure management.
In Atrial Fibrillation, new irrigated ablation catheters for treating cardiac arrhythmias should help St. Jude sustain the healthy growth through 2011. Growth in St. Jude’s Neuromodulation franchise will be fostered by the expanded adoption of deep brain stimulation (“DBS”) systems. The U.S. approval of the DBS system in Parkinson’s disease (expected in 2012), represents another promising prospect.
Synergies of the AGA Medical acquisition should continue to boost results in Cardiovascular division. St. Jude forayed into the $500 million market for pericardial stented tissue valves with its Trifecta line of valves. Its tissue valve business is currently growing more than 50%.
Among other emerging opportunities, St. Jude expects to commence the European clinical trial of Portico valve in fourth-quarter 2011 and is optimistic about its entry into the European transcatheter aortic valve implant (“TAVI”) market before end-2012.
The company recently unveiled some exciting new opportunities including the percutaneous mitral valve repair (“PMVR”) program, the left atrial appendage (“LAA”) closure system and the new renal denervation catheter for treating resistant hypertension.
However, St. Jude and its compatriots Medtronic (MDT - Free Report) and Boston Scientific (BSX - Free Report) are increasingly in a tug-of-war to grab CRM share. Decelerating ICD market growth may continue to weigh on the company’s results.
St. Jude expects the worldwide CRM market to remain challenged and continue to project the market to contract 2% in 2011, thereby hurting its CRM sales. The company has further trimmed its fiscal 2011 CRM sales forecast due to market headwinds and delay in the approval of quadripolar CRT-D in the U.S.
We are also cautious about the dilutive impact of acquisitions and foreign exchange headwinds. Our Neutral recommendation on St. Jude is in agreement with a Zacks #3 Rank (Hold).
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