Earnings Preview: St. Jude Medical (STJ)

Medical devices giant St. Jude Medical (STJ) is expected to report its second-quarter fiscal 2010 results before the opening bell on Thursday, July 22, 2010. In its first-quarter conference call, the company stated that it expects to post earnings per share between 73 cents and 75 cents. Besides, it raised earnings estimate for fiscal 2010 to $2.80-$2.85 from the earlier projection of $2.71-$2.76.

The current Zacks Consensus Estimate for the second-quarter is 73 cents, representing a 16.06% annualized growth. St. Jude has posted three positive earnings surprises in the preceding four quarters while it met the Zacks Consensus Estimate on the other occasion. Based on this favorable trend, we expect the company to outperform in the upcoming quarter.

First-Quarter Flashback

St. Jude reported first-quarter earnings per share of 75 cents, outpacing the Zacks Consensus Estimate of 68 cents and the year-ago earnings of 57 cents. The better-than-expected results were fueled by healthy top-line growth, benefited by the product recall of its rival Boston Scientific (BSX) in March 2010.

Revenues rose 11%, boosted by growth across all business segments and favorable foreign currency exchange swings. CRM sales leapt 11% year over year led by strong demand for the company’s ICDs and pacemakers.

Cardiovascular, Atrial Fibrillation and Neuromodulation revenues grew 7%, 17% and 15%, respectively. Higher gross margin coupled with lower operating expenses helped St. Jude increase its operating margin in the quarter.

Estimate Revisions Trend

Agreement of Analysts

Estimates for the second quarter are edging towards the negative side over the past month, manifesting a potential for some downside pressure on the stock. Out of 26 analysts covering the stock, 3 have lowered their earnings estimates while two have made positive revisions.

Estimates for fiscal 2010 reflect downward revisions with 3 out of 27 analysts having downwardly revised their forecasts over the last 30 days with one reverse movement. However, the estimates reflect a positive sentiment over the past week with 2 analysts lifting forecasts and none moving in the opposite direction.

The bearish sentiment for the upcoming quarter reflects the macro concerns emanating from the soft capital spending backdrop in Europe and translation risks arising from the foreign exchange headwinds as a result of a weakening Euro vis-à-vis the U.S. dollar are an overhang on the stock. On the contrary, positive revisions are fueled by the encouraging growth prospects in the company’s core ICD business, supported by new product launches, realignment of sales organization, solid inventory position and favorable market trends. The following table epitomizes the estimate revisions trend.

Magnitude of Earnings Revisions

The magnitude of revisions for the second quarter has been static over the last 7 and 30 days, which implies that the analysts are expecting the company to report in line. Estimates for 2010 have gone up by a penny over the past week, but remained unchanged over the last month. The current Zacks Consensus Estimate for 2010 is $2.84, reflecting year-over-year growth of 16.69%.

Our Take on St. Jude

St. Jude has been producing consistent revenue and earnings growth over the past few quarters. Moving forward, revenue growth should be further fueled by numerous product introductions and technological advancements. Launch of several ICD products in the U.S. and Europe should boost the company’s CRM market share in fiscal 2010.

St. Jude’s ICD business is benefiting from rival Boston Scientific’s recall of ICD devices due to certain changes in the manufacturing process not approved by the federal regulators. Moreover, Neuromodulation represents an emerging opportunity for St. Jude, which offers its spinal cord stimulators in this nascent but fast-growing market.

While St. Jude is well positioned to savor incremental opportunities in the CRM segment (especially in ICDs) on the back of a strong product pipeline, the company is challenged by competition-driven pricing pressure and the heightened competition in a mature pacemaker market. Moreover, we are cautious about the dilutive impact of any unfavorable currency exchange fluctuations on the bottom line. This is reflected in our Neutral recommendation for the stock, which is supported by a Zacks #3 Rank (Hold).

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