Subsequent to the announcement of Medtronic’s (MDT) first quarter fiscal 2011 results on Aug 24, 2010, majority of the analysts have lowered their estimates for the forthcoming period.
First Quarter Highlights
Medtronic began fiscal 2011 on a disappointing note. The company reported an adjusted EPS of 80 cents, which missed the Zacks Consensus Estimate by two cents but was a penny higher than the year-ago quarter. However, first quarter of fiscal 2010 included an extra week, which had a positive impact of 5 cents. Excluding the impact, the EPS recorded a growth of 8%.
Revenues were $3.77 billion, down 4% compared to the year-ago quarter and missed the Zacks Consensus Estimate of $3.95 billion. However, after considering unfavorable currency movements ($21 million) and the benefit of an extra week in the year-ago quarter ($200 million), revenues increased 2%.
Based on a disappointing quarter, Medtronic lowered its guidance for 2011. Earlier in June, the company at an analysts’ meet projected a 5%-8% revenue growth based on market growth of 4%-7%. However, the company witnessed a market growth of 3%-4% during the quarter based on which revenues and adjusted EPS are expected to increase 2%-5% at constant exchange rates and 9%-11% (earlier guidance 10%-13%), respectively.
For a full coverage on the earnings, read: Medtronic Misses, Lowers Guidance
Estimate Revision Trends
In accordance with the company’s disappointing performance in the first quarter and lowering of outlook, the recent Zacks Consensus Estimate revision trends remain negative for the upcoming period.
Over the past 30 days, 20 of the 23 analysts covering the stock have made downward revisions for the second quarter without any opposite movement. The negative trend persists for the third quarter as well with 16 downward revisions and 3 in the reverse direction.
The situation remains unchanged for fiscal 2011 with 21 of 26 analysts lowering their estimates in the past 30 days. For fiscal 2012, 18 analysts have revised their estimates downward without any upward movement.
Many factors were responsible for the dismal performance of the company during the first quarter. Medtronic had witnessed a deceleration in both volumes and procedures resulting from the current macro environment which led to high unemployment and increasing patient deductibles. This in turn forced hospitals to lower their bulk purchases in July across many of the company’s businesses and geographies. Moreover, the company also witnessed some impact of recent austerity measures undertaken in Europe, though not dramatic, in certain markets.
Another factor that hampered Medtronic’s business during the quarter was increasing pricing pressure. The situation worsened in Japan where reduced reimbursement resulted in significant decline in some of the company’s products.
Revenues derived from two of the largest segments of Medtronic – CRDM and Spinal declined by 8.3% and 9%, respectively. Medtronic was not able to hold on to the market share gain following Boston Scientific’s (BSX) halt of implantable cardioverter-defibrillators (ICDs) shipment. Although Medtronic expects to recapture some of the lost share with the launch of Protecta ICDs, its launch is tied to the resolution of a manufacturing related issue with the US Food and Drug Administration (FDA).
Based on current market conditions and estimating the CRDM market to grow at 0%-3%, the company expects revenues from this segment to remain flat in fiscal 2011.
The decline in revenues derived from the Spinal business can be attributed to current macroeconomic conditions which are causing delays in elective procedures due to high co-pays and expired benefits. This in turn has resulted in lower growth of the overall market driven by decline in both procedures and price mix.
According to company estimates, during the first quarter, growth in the US spine market has declined by 400 basis points sequentially and is currently growing in the low to mid-single digits. Based on current conditions, Medtronic expects revenue growth from this segment to remain flat with a 3%-4% growth in the spine market.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for the forthcoming period has been significant. In the past 30 days, estimates for the second and third quarters have dropped by 3 cents to 82 cents and 2 cents to 85 cents, respectively. Moreover, estimates for fiscal years 2011 and 2012 have reduced by 7 cents to $3.42 and 15 cents to $3.67, respectively, in the past 30 days.
Although we are encouraged by the growth of the CardioVascular and Diabetes segments, we remain concerned about CRDM and Spinal. Growth in the two markets (CRDM, Spinal) has slowed considerably which is reflected in the results. Pricing pressure and slower market growth forced Medtronic to lower its outlook for these segments. The situation can worsen further if the economic condition deteriorates further. Given these headwinds in the near future, we have a Zacks #4 Rank (sell) on the company.
However, Medtronic has a strong portfolio which is gaining acceptance. Moreover, the company’s strong pipeline has the potential to drive revenues going ahead. Although Medtronic is witnessing pricing pressure in the US market, it earns 41% of its revenues from international operations. It is increasing its focus on emerging markets and is targeting at increasing revenue contribution from this region. Besides, a strong cash position bodes well for suitable acquisitions. However, the company is operating in a highly competitive environment and is exposed to currency fluctuation.
Given the long-term outlook of the company, we are Neutral on the stock.