STJ ST. Jude Medical, Inc.

Medical devices giant St. Jude Medical’s (STJ) second-quarter fiscal 2011 adjusted earnings per share of 85 cents beat the Zacks Consensus Estimates by a penny and exceeded the year-ago earnings of 79 cents.

The Quarter Revisited

Net income, as reported, slid 5.2% year over year to $241 million (or 72 cents a share) on account of sizable charges related to the company’s acquisition of AGA Medical and restructuring of certain activities at its core Cardiac Rhythm Management (“CRM”) division.

Revenues surged 10% year over year to $1,447 million, led by healthy performances across the company’s Cardiovascular and Atrial Fibrillation franchises as well as strong contribution from international operations. Sales were essentially in line with the Zacks Consensus Estimate.

Revenues from the CRM division grew just 1% year over year to $793 million impacted by softness across the ICD and Pacemaker businesses. Atrial Fibrillation and Neuromodulation revenues surged 18% and 9% year over year, respectively, in the quarter. The cardiovascular division had a solid quarter with revenues cruising 35%, buoyed by the AGA Medical acquisition. The company chopped its earnings and CRM sales forecasts for fiscal 2011, based on sluggish market conditions.

We have discussed the quarterly results at length here: St. Jude a Penny Ahead, Net Slips.

Agreement – Estimate Revisions

Estimates for St. Jude are trending down following the second quarter results, strongly reflecting management’s reduced sales, earnings and CRM market forecasts. Out of total 25 analysts currently coving the stock, 5 and 21 have pruned their forecasts for fiscal 2011 over the past week and month, respectively, with none moving in the opposite direction.

A somewhat similar trend applies to the forecasts for fiscal 2012 with 9 analysts (out of 30) chopping their estimates over the last 7 days with just 2 making positive revisions. Also, there were 19 negative revisions over the past 30 days accompanied by a couple of reverse movements. The strong bearish sentiment reflects a soft U.S. ICD market, tempered CRM outlook and a delay in the timing of approval and launch of a much-anticipated product.   

Magnitude – Consensus Estimate Trend

Estimates for fiscal 2011 remained stationary over the past week while falling 3 cents over the past month. A surfeit of negative revisions coupled with a directional agreement has led to a decline in the magnitude of revisions for fiscal 2012. Estimate for 2012 has declined by a penny over the last 7 days and by 3 cents over last 30 days. The current Zacks Consensus Estimate for fiscal 2011 and 2012 are $3.28 and $3.65, respectively.   

Neutral on St. Jude

St. Jude is consistently producing revenue growth over the past several quarters. We are impressed by its solid fundamentals, healthy growth trajectory, cost management initiatives, strong product mix and attractive growth prospects in a number of emerging markets.

The company is poised for incremental opportunities in CRM on the back of strong product momentum. St. Jude’s Fortify and Unify devices are already gaining notable traction. Several new products should boost the company’s CRM share in 2011, despite of the weak market conditions.

The European clearance of the Accent MRI pacemaker and the U.S. approval ShockGuard technology, designed for use with the Fortify and Unify systems, represents an incremental positive for the company. Also, St. Jude’s strategic investment in cardiac devices maker CardioMEMS represents another significant opportunity to boost its technologies focused on improving heart-failure management.

The CardioMEMScongestive heart failure monitor, scheduled for full launch in the U.S. in 2012, will help St. Jude gain CRM share. Moreover, the company’s April 2011 pact with health care supply contracting company Novation should broaden the use of its CRM products and technologies.

In Atrial Fibrillation, new irrigated ablation catheters (Safire BLU and Therapy Cool Path) for treating cardiac arrhythmias should help St. Jude sustain the healthy growth through 2011.

Growth in Neuromodulation will be fostered by the adoption of the company’s deep brain stimulation (“DBS”) systems. The European approval for the DBS system in the migraine indication (expected in end-2011) and U.S. approval in Parkinson’s disease (expected in 2012) represents promising prospects.

On the Cardiovascular front, synergies of the AGA Medical acquisition should continue to boost results in this division. St. Jude entered the $500 million market for pericardial stented tissue valves with the approval of its Trifecta line of valves, representing a new major driver. Its tissue valve business is currently growing more than 30%.

In vascular, the company has commenced the European launch of the “Ilumien” integrated Fractional Flow Reserve (“FFR”) and Optical Coherence Tomography (“OCT”) product and expects a U.S. launch in the near future. With respect to the transcatheter aortic valve implant (“TAVI”) program, St. Jude expects to commence the European clinical trial of Portico valve in late 2011 (launch expected by first-half 2013). The TAVI market represents a potential blockbuster prospect.

However, St. Jude has several challenges ahead. The company and its peers Medtronic (MDT) and Boston Scientific (BSX) are tussling to grab share in the soft CRM market. Competition has intensified with the launch of the Protecta line of defibrillators by Medtronic, aggravating price competition.

Moreover, management’s recently revised guidance reflects sustained weakness in the CRM market. St. Jude now expects the worldwide CRM market to contract 2% in 2011, thereby hurting its CRM sales. The company has trimmed its fiscal 2011 CRM sales forecast due to market headwinds (notably in ICD) and assumption that approval of the highly expected quadripolar CRT-D is delayed to early fourth-quarter 2011 from mid-2011. The product has been viewed as a major new growth prospect in CRM.

We are also cautious about the dilutive impact of acquisitions. Our Neutral recommendation on St. Jude is backed by a Zacks #3 Rank (Hold).

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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