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/.
BOSTON SCIENTIF (BSX): Free Stock Analysis Report
MEDTRONIC (MDT): Free Stock Analysis Report
ST JUDE MEDICAL (STJ): Free Stock Analysis Report
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