Earnings Preview: Medtronic

Leading medical devices company Medtronic (MDT) is expected to report its fourth quarter and fiscal 2011 results before the market opens on May 24, 2011. The company is expected to earn an EPS of 93 cents on revenues of $4.286 billion during the quarter and $3.40 on revenues of $15.925 billion, according to the Zacks Consensus Estimate.

Barring the first quarter of fiscal 2011, Medtronic has surpassed expectations for the trailing four quarters, though marginally. The four-quarter positive surprise of 0.89% implies that the company has beaten the Zacks Consensus Estimate by this magnitude over the last four quarters.

Previous Quarter Highlights

Medtronicreported a 12% growth in adjusted EPS to 86 cents during the third quarter of fiscal 2011, and beating the Zacks Consensus Estimate of 83 cents. Revenues were $3.961 billion, up 3% compared with the year-ago quarter and in line with the Zacks Consensus Estimate.

The company recorded 43% of its total sales from the international market during the quarter. Sales derived from the international market increased 5% year over year to reach $1.702 billion. However, excluding the $22 million of negative impact due to currency movement, international revenues increased 7%. Revenues derived from the emerging markets increased 26% to $350 million.

Medtronic’s seven divisions – Cardiac Rhythm Disease Management (CRDM), Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control – generated sales of $1.221 billion (down 2% year over year), $861 million (up 2%), $774 million (up 7%), $401 million (up 2%), $341 million (up 10%), $259 million (up 8%) and $104 million (up 4%), respectively. Although CRDM revenues continued to decline during the quarter, it is encouraging to note that Spinal recorded growth, though modest.

Agreement and Magnitude of Estimate Revisions

Estimates for the fourth quarter have been lowered over the past month. Although the economy is witnessing gradual improvement, the continuous decline in CRDM concerns us greatly. Out of the 23 analysts covering the stock, 2 have lowered their estimates with 1 moving in the opposite direction. In the last 7 days, 2 analysts reduced their estimates for the quarter. For fiscal 2011, estimates were revised in both directions by 1 analyst each over the last month. Over the past 30 days, estimates for the fourth quarter and fiscal remained unchanged at 93 cents and $3.40, respectively.

In addition to reporting results, Medtronic will provide guidance for 2012, which is significant. The company is expected to record an EPS of $3.63 in 2012.

We will await an update from the company regarding the status of the CRDM segment, which has been witnessing challenges in the form of pricing pressures in the US market. This segment also witnessed a number of challenges including physician reaction to recent study results published by the Journal of the American Medical Association regarding evidence-based guidelines for ICD implants and US Department of Justice’s investigation into hospitals’ ICD implants. A leading player in this field, Boston Scientific (BSX), recorded a $723 million of goodwill impairment charge associated with its US CRM business unit during the quarter.

However, the scenario is set to improve gradually based on the recent product launches that consist of Revo MRI SureScan pacemaker and Protecta ICDs. Moreover, the long awaited issue of Medtronic’s warning letters from the US Food and Drug Administration (FDA) were finally resolved in March. The letters were issued in relation to its Mounds View facility (received in November 2009) and manufacturing facility in Juncos, Puerto Rico (June 2009).

Orthopedic medical devices companies are continuing to witness challenges in the form of pricing pressure and lower procedure volume arising from economic uncertainty. However, the situation is gradually stabilizing. We expect the improving trend of this segment to continue.

We also expect an update regarding the US trial of Medtronic’s CoreValve system. Recently, the company provided positive data regarding this product at the EuroPCR 2011.

Medtronic had announced a restructuring initiative, to make it sustainable for long-term growth. As a part of this plan, about 4%-5% of the workforce (representing 1500-2000 positions) will be reduced during the fourth quarter. Consequently, the company will incur a one-time charge related to the restructuring during the fourth quarter. We expect an update regarding this initiative from the company.


Although the CRDM segment continues to remain under pressure, Medtronic expect this segment to stabilize based on the recent product launches. Moreover, the Spinal should benefit gradually from a gradual improvement in economic scenario. Meanwhile, Medtronic is increasing its focus on emerging markets and emerging therapies and expects these to be major growth drivers going ahead. Besides, acquisitions should enable the company to record higher revenues in the forthcoming period. However, the company operates in a highly competitive environment and is exposed to the risk of currency movement.

For the long term, we have a Neutral rating on Medtronic. The stock retains a Zacks #3 Rank (Hold) for the short term.

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