Earnings Preview: Medtronic (BSX) (MDT) (STJ)

Zacks

Leading medical devices company Medtronic (MDT) is scheduled to report its first quarter fiscal 2013 results before the market opens on Tuesday, August 21, 2012. The company is expected to earn EPS of 85 cents on revenues of $4.015 billion during the quarter, according to the Zacks Consensus Estimates.

Medtronic exceeded its expectations twice in the last four quarters and was in line with the remaining two. Over the past four quarters average earnings surprise is a positive 1.73%. This implies that the company has surpassed the Zacks Consensus Estimate by this magnitude over the last four quarters.

Previous Quarter Highlights

Medtronic reported fourth quarter fiscal 2012 adjusted EPS of 99 cents, up 10% year over year and ahead of the Zacks Consensus Estimate by a penny. Revenues were $4.297 billion in the quarter, up 3% (up 4% at constant exchange rates or CER) year over year, beating the Zacks Consensus Estimate of $4.233 billion.

Medtronic’s six divisions – CRDM, Spinal, CardioVascular, Neuromodulation, Diabetes, and Surgical Technologies – generated corresponding sales of $1.295 billion (down 2% year over year but flat at CER), $958 million (up 9% or up 10% at CER), $818 million (down 7% or down 6% at CER), $463 million (up 7% or up 8% at CER), $392 million (up 7% or up 8% at CER), and $371 million (up 24% or up 25% at CER).

Agreement of Estimate Revisions

Estimate revision trends among the analysts for the fourth quarter and the full fiscal year have been insignificant. Over the last 30 days, out of 18 estimate revisions, 1 has been revised upward with 1 in the opposite direction. The current fiscal year has experienced 1 upward revision over the past month with 2 revisions in the negative direction.

As reported by other MedTech majors such as Boston Scientific (BSX) and St Jude Medical (STJ), we expect unfavorable currency to adversely impact Medtronic’s first quarter performance.

The company’s performance in the CRDM market is awaited as other major players have reported declining sales from this segment. Although Spine, struggling with its headwinds, will continue to disappoint, sales of the CardioVascular segment would benefit from the recent launch of the Resolute Integrity drug eluting stent for the treatment of coronary artery disease. During the last quarter, the company recorded an increase in market share subsequent to the launch of Resolute Integrity. Besides, we also expect growth in the atrial fibrillation business to maintain the growth momentum.

Medtronic’s prominent presence in the European market, which is shrouded in macroeconomic challenges, might affect the company’s sales growth. The company might have to revise its guidance for 2013 to reflect the current challenges at play.

Magnitude of Estimate Revisions

Given the dearth of estimate revisions from the analyst community, the consensus estimate for the current quarter remained static at 85 cents over the past one month. The consensus estimate for fiscal 2013 also remained unchanged at $3.66.

Recommendation

Having witnessed several headwinds in its two segments – CRDM and Spinal – Medtronic is trying every means to revive growth. This includes penetration of international markets, portfolio expansion and restructuring initiatives, which should benefit the company over the long term. Moreover, acquisitions completed over the past few years are contributing to total revenues, a positive trend that is expected to continue. Meanwhile, Medtronic has increased its focus on the emerging markets that have been garnering significant growth.

Longer term, we have a Neutral recommendation on Medtronic. The stock retains a Zacks #3 Rank (“Hold”) in the short term.

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