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Will Ventilator Sales Drive Medtronic's (MDT) Q4 Earnings?

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Medtronic plc (MDT - Free Report) is scheduled to report fourth-quarter and fiscal 2020 results on May 21, before the opening bell.

In the last reported quarter, the company’s earnings beat the Zacks Consensus Estimate by 4.35%. Moreover, the bottom line outpaced estimates in each of the trailing four quarters, the average being 4.74%.

Let’s see how things have shaped up prior to this announcement.

Factors at Play

Medtronic, which has a strong global base, is expected to have witnessed a notable reduction in product demand across its core business segments (due to the massive disruption in the global supply chain and postponement of elective and non-COVID 19 healthcare activities). This might have hurt its revenues.

On Apr 21, the company released a public statement mentioning that it expects COVID-19 to affect its fiscal fourth-quarter results (the quarter that ended on Apr 24, 2020). In fact, the company apprehends its fourth-quarter results to reflect an additional month of impact compared to many other companies who operate on a calendar-based year (ending Mar 31).

The company noted that apart from the decision of deferrals of elective procedures made by many government agencies and healthcare systems, hospital resources too have been diverted to fight the pandemic. Some crucial procedures may have been deferred as many patients  tried to avoid any non-COVID-19 emergency treatment. This might have resulted in an adverse impact on the company’s emergent product lines.

Medtronic PLC Price and EPS Surprise

Medtronic PLC Price and EPS Surprise

Medtronic PLC price-eps-surprise | Medtronic PLC Quote

However, we are upbeat about certain line of products by the company, which are treated under more urgent category and might have borne a relatively lesser impact of coronavirus. Among these, the company is particularly hopeful about its Extracorporeal Life Support products, including ECMO machines and disposables, within its Cardiac Surgery business of CVG (Cardiac and Vascular Group); Ventilators, pulse oximetry, capnography, and advanced parameter monitoring products within its Respiratory and Patient Monitoring business of MITG (Minimally Invasive Therapies Group) and Supplies and consumables within Diabetes Group.

The company expects stronger-than-usual demand for these product lines as a result of COVID-19. Particularly, in terms of ventilator production, per the company’s Apr 8 update, it saw solid progress in ventilator production. Till that time, the company also collaborated with technology partners and governments to drive new ventilator innovation and production to support COVID-19 patients worldwide. This might have contributed to the company’s fourth-quarter CVG revenues.

However, these product lines represented just 10% of Medtronic’s pre-COVID-19 global revenues. Further, ventilators and diabetes supplies both generally carry a lower profit margin. This is again a concern as chances of an increase in sales of these products during the fourth quarter minimizing the loss of sales in this period is low.

Geographically, in China (that generated 7% of revenues during pre-COVID-19 period), the company expects entire fiscal fourth quarter performance to be affected by the COVID-19 impact. In Western Europe (20% of pre-COVID-19-revenues), the company noted that sales started to decline from the week of Mar 23. In the United States (53%), the company began to see an impact on revenues from the week of Mar 16. In the rest of the world (20%), Medtronic noted varying degrees of impact, the average decline in the last few weeks being 40% to 50% year over year.

Q4 Estimates

The Zacks Consensus Estimate for fiscal fourth-quarter total revenues of $7.30 billion suggests decline of 10.4% from the prior-year reported number. The consensus mark for earnings of $1.13 per share implies 26.6% decline from the year-ago reported figure.

What Our Quantitative Model Predicts

Per our proven model, a stock needs to have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to deliver a positive earnings surprise. But this is not the case here as you will see below.

Earnings ESP: Medtronic has an Earnings ESP of -31.9%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Medtronic carries a Zacks Rank #4 (Sell). 

Stocks Worth a Look

Here are a few medical stocks worth considering from the same space with the right mix of elements to surpass expectations this earnings season.

Axovant Sciences Ltd. (AXGT - Free Report) has a Zacks Rank #1 and an Earnings ESP of +13.27%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Summit Therapeutics PLC (SMMT - Free Report) has a Zacks Rank of 2 and an Earnings ESP of +1.72%.

Canopy Growth Corporation (CGC - Free Report) has a Zacks Rank of 3 and an Earnings ESP of +8.09%.

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