STJ ST. Jude Medical, Inc.

Subsequent to the announcement of Medtronic’s (MDT) fourth quarter and fiscal 2011 results on May 24, 2011, a majority of analysts have lowered their estimates for the forthcoming period.

Previous Quarter Highlights

Medtronic reported an EPS of 72 cents during the fourth quarter of fiscal 2011 compared to 86 cents in the year-ago period. However, considering certain adjustments (primary being restructuring charges of 18 cents per share), the adjusted EPS came in at 90 cents, missing the Zacks Consensus Estimate of 93 cents, but a  penny higher than the fourth quarter of fiscal 2010.

For fiscal 2011, the company reported a 5% growth in adjusted EPS to $3.37, lower than the Zacks Consensus Estimate of $3.40.

Revenues were $4.295 billion in the quarter, up 2% (flat at constant exchange rates or CER) compared with the year-ago quarter and marginally above the Zacks Consensus Estimate of $4.286 billion.

For the full year, sales increased 1% to $15.933 billion and were higher than the Zacks Consensus Estimate of $15.925 billion. However, the growth rate is 2% at CER and after considering the $200 million of revenue benefit from the extra week in the first quarter of fiscal 2010.

Medtronic provided its outlook for 2012. The company expects to report a 1%−3% revenue growth at CER resulting in EPS of $3.43−$3.50, which considers $0.04−$0.06 of dilution from the Ardian acquisition. According to the Zacks Consensus Estimate, Medtronic was expected to record an EPS of $3.63 in 2012.

For a full coverage on the earnings, read: Medtronic Misses on EPS, Revs Beats

Estimate revision trends

In accordance with disappointing guidance for 2012, the recent Zacks Consensus Estimate revision trends remain negative for the upcoming period. The challenges being faced by the two largest segments of the company are primarily responsible for the downward revision in estimates.

Over the past 30 days, 12 of the 21 analysts covering the stock have made downward revisions for the first quarter of fiscal 2012 without any positive revisions.  Moreover, for fiscal 2012, 23 of the 24 analysts covering the stock lowered their estimates.

According to the company’s estimates, its markets are currently growing in the low-single digits versus 6−7% in the previous year. In addition, the company had been struggling with the issue of warning letter that delayed the launch of several key products thereby affecting the pricing pressure. However, the issue was resolved recently.

Due to these numerous headwinds, the company’s revenue came in at $1 billion lower than its original expectation. While the situation is improving gradually, the two biggest segments at Medtronic – CRDM and Spinal continue to remain under pressure.

Medtronic’s 2/3 of current revenue is from markets growing below mid-single digits, which forced the company to look for newer technologies to make up for some of the lost sales. However, any immediate benefit is not expected.

The US ICD market declined in high-single digits, which coupled with lower procedural volume led to the market slowdown. While many factors are responsible for lower procedures, Medtronic believes that primary among them are the JAMA article published in January and the DOJ investigation of hospitals.

Magnitude of estimate revisions

The magnitude of estimate revisions for the forthcoming period has been significant. In the past 30 days, estimates for the first two quarters have dropped by 5 cents to 80 cents and 3 cents to 84 cents, respectively. Moreover, estimates for fiscal 2012 were lowered by 16 cents to $3.47.

Our Recommendation

Medtronic recorded a 2% growth in revenues during the fourth quarter although sales continued to decline in its two largest segments, CRDM and Spinal. However, the company believes that the recent approval of MRI SureScan pacemaker and Protects ICD should provide some support to the CRDM segment.

Meanwhile, Medtronic is increasing its focus on emerging markets and emerging therapies and expects these to be major growth drivers going ahead. Besides, acquisitions should enable the company to record higher revenues in the forthcoming period. However, pricing pressure continues to be a major concern.

The company also operates in a highly competitive environment with the presence of players such as Boston Scientific (BSX) and St Jude Medical (STJ) and is exposed to the risk of currency movement. Moreover, uncertainty remains regarding the course of action to be adopted by the new CEO.

Given the long-term outlook of the company, we are Neutral on the stock which also corresponds to the Zacks # 3 Rank (hold) in the short term.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/

 
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