Ireland-based medical device major Medtronic plc MDTis slated to report its second-quarter fiscal 2016 earnings on Dec 3, before the opening bell.
Last quarter, the company delivered a positive earnings surprise of 0.99%. Impressively, Medtronic’s earnings have outpaced the Zacks Consensus Estimate in all of the past four quarters, with an average beat of 2.40%. Let’s see how things are shaping up prior to this announcement.
Factors at Play
While Medtronic continues to be plagued by a robust foreign exchange headwind, the company’s strong operations render optimism for a brighter fiscal 2016. The company’s unchanged EPS guidance for fiscal 2016 meanwhile demonstrates that the foreign currency translation will not likely have any additional adverse effect on the company’s bottom-line outcome.
During the fiscal first quarter, Medtronic formed a joint venture by way of which it gained controlling interest in its largest distributor in Saudi Arabia. The transaction is expected to deliver incremental revenues and improved margins for the company starting from the fiscal second quarter.
On the other hand, as far as the Covidien acquisition goes, Medtronic is making excellent progress with the integration of Covidien into its business. The company has already started to gain from its first and highest priority ‘preserve’, which is evident from the continued revenue growth witnessed across all business groups and geographies in the fiscal first quarter.
Under the priority ‘optimize’, Medtronic is on track to achieve the expected minimum of $850 million in cost synergies by the end of fiscal 2018. Already, the company has completed over half of its fiscal 2016 value capture initiative target entailing expected savings target of $300 million to $350 million by the end of fiscal 2016.
On the flip side, the company still expects to face severe currency headwind through fiscal 2016. As estimated earlier, Medtronic expects foreign exchange to negatively impact its fiscal 2016 sales by $1.3 billion to $1.5 billion, including the negative $425 million to $475 million impact in the second quarter. Moreover, fiscal 2016 earnings per share are still expected to face 40 cents to 50 cents of negative currency impact.
Earnings Whispers
Our proven model does not conclusively show that Medtronic is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Zacks ESP: Medtronic has an ESP of 0.00%. That is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.00.
Zacks Rank: Medtronic has a Zacks Rank #3 which increases the predictive power of ESP. However, we need to have a positive ESP to be able to confidently predict an earnings beat.
Note that, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are some companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
Casey's General Stores, Inc. CASY, earnings ESP of +2.08% and a Zacks Rank #2.
CarMax Inc. KMX, earnings ESP of +1.45% and a Zacks Rank #2.
Eli Lilly and Company LLY, earnings ESP of +2.60% and a Zacks Rank #2.
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