STJ ST. Jude Medical, Inc.

Medical devices giant St. Jude Medical (STJ) is slated to report its first-quarter fiscal 2011 results before the opening bell on Wednesday, April 20. In its fourth-quarter 2010 commentary, the Minnesota-based company stated that it expects first quarter adjusted earnings per share of between 77-79 cents. The current Zacks Consensus Estimate for the quarter is 78 cents, representing an estimated 4.16% annualized growth.

With respect to earnings surprise, St. Jude has posted four positive surprises in the preceding four quarters and we expect this impressive trend to continue in the first quarter. St. Jude has produced an average positive earnings surprise 6.44% over the last four quarters, implying that it has beat the Zacks Consensus Estimate by that measure.

Fourth-Quarter Flashback

St. Jude posted better-than-expected fourth quarter fiscal 2010 results with adjusted earnings of 75 cents beating the Zacks Consensus Estimates by a penny while exceeding the year-ago earnings of 64 cents. Profit climbed 8.9% year over year on the back of growth across the board.

Revenues leaped 12% year over year to $1,350 million, beating the Zacks Consensus Estimates of $1,323 million. AGA Medical, which St. Jude acquired in November 2010, contributed $25 million to the top line.

Sales were boosted by strong momentum at the company’s implantable cardioverter defibrillator (“ICD”) business with revenues surging 16% to $458 million. St. Jude’s new Fortify and Unify ICD devices gained notable traction. However, strong ICD sales were partly masked by a soft pacemaker business.

St. Jude’s Atrial Fibrillation and Neuromodulation franchises posted double-digit growth in the quarter. Cardiovascular revenues, including AGA Medical’s contributions, surged 20% to $287 million.

Estimate Revisions Trend

Agreement

Estimates for the first quarter reflect limited activity over the past week with just 1 out of 25 analysts having lowered his/her forecast while none raising their estimates. Estimates have been mixed over the past month with 2 analysts having lifted their forecasts accompanied by a couple of negative revisions, thereby lacking any directional agreement.

On a somewhat similar note, estimates for fiscal 2011 demonstrate lack of movements over the past week with just one analyst (out of 31) having lifted his/her forecast with a solitary downward revision. Estimates have edged towards the positive side over the last 30 days with 3 analysts having hiked their forecasts accompanied by 2 reverse movements.

Encouraging prospects in the company’s core ICD business, supported by new products, inspire bullishness in some analysts. On the contrary, heightened competition in the CRM space (ignited by new product launches by rivals) coupled with ongoing pricing pressure has prompted some analysts to tread with caution.

Magnitude

The magnitude of revisions for first quarter has been static over the last 7 and 30 days, a reflection of the relative lack of directional pressure. A similar pattern applies to the estimates for fiscal 2011. The current Zacks Consensus Estimate for fiscal 2011 is $3.28, representing an estimated year over year growth of 9.05%.   

St. Jude in Neutral Zone

We remain impressed with St. Jude’s ability to deliver consistent revenue and earnings growth and believe that its first quarter results to be supported by new products. Notably, the company’s Fortify and Unify devices should help it gain share in the ICD space. 

St. Jude should expand its position in CRM (especially ICDs) with a strong pipeline of new ICD devices (including the quadripolar CRT systems) scheduled for launch in the U.S. in 2011. The recent approval of the ShockGuard technology, designed to be used with the Fortify and Unify systems to reduce inappropriate and unnecessary shocks to patients with ICDs, represents an incremental positive for the company. 

However, St. Jude and its peers Medtronic (MDT) and Boston Scientific (BSX) are increasingly in a tug-of-war to grab market share in the soft CRM market. Competition has intensified with the launch of the Protecta line of defibrillators by Medtronic in March 2011. Tough competition between ShockGuard and Protecta should aggravate price competition.   

Outside the core CRM segment, we expect revenues from St. Jude’s Neuromodulation business to be driven by the sustained adoption of its deep brain stimulation (“DBS”) systems and the Eon Mini SCS system. On the Cardiovascular front, synergies of the AGA Medical acquisition should boost results in this division.

While we are impressed with St. Jude’s solid fundamentals, strong product mix, healthy growth trajectory and operating leverage, we remain wary of competition-driven pricing pressure and the dilutive impact of acquisitions and any unfavorable currency exchange fluctuations on the bottom line. Currently, we are Neutral on the stock, backed by a short-term Zacks #3 Rank (Hold).

 
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